There is no straightforward answer to whether you should rent or buy a home. We are all sold on the dream of working hard and owning a home. While this dream is admirable it’s not for everyone and is sometimes a bad bargain.
The mortgage crisis that triggered the 2008 financial crash is proof of this. Buying a home without the right conditions in place can prove to be a burden leading to huge losses.
It’s a huge financial decision that depends on various factors such as:
- Your age
- Your financial capability (Learn how to budget for your first home!)
- Your plan and life goals
- Current real estate market
- Current mortgage interest rates
So is renting a home the answer?
The Pros of Renting a Home
Little to No Responsibility
If the home you’re renting suddenly springs a leak in the roof, the most you’ll be worried about is the damage to your belongings. The headache of getting contractors and funds to fix the roof is not yours. It falls on the homeowner.
That’s the primary benefit of renting. You can up and leave whenever you choose, signing a lease that suits your lifestyle. You don’t have to worry about the cost of maintaining a house and the taxes and fees involved.
Predictability and Affordability
When you’re renting, you know for sure how much you’ll spend on rent and utilities. You can then budget accordingly. Even rent increments are usually communicated ahead of time.
Homeowners, however, may enjoy a seemingly peaceful financial period only to be flooded with repair costs that can run thousands of dollars. Mortgage interests and insurance premiums can also be quite high for homeowners.
The Cons of Renting a Home
Unless you live in a rent-controlled apartment, rent hikes can be steep when your lease is up for renewal. You’re at the mercy of your landlord. The same goes for whether repairs are done on time or not.
You Can’t Build Equity
Equity is the value you get from your house once all debts are paid. Building this value is not an option available to renters. The monthly rent you pay doesn’t contribute to you owning an asset.
The Pros of Buying a Home
Homeownership gives one a sense of accomplishment. It is a tenet of the American dream.
It also imparts a sense of safety. Basically, you own the roof over your head, or will once you finish your mortgage payments.
Whether it is tiny and mobile or sprawling, knowing that you can close the door and be in your own space is very reassuring to most.
A Long-Term Investment
Once you check off all the criteria of a successful homeowner, having a home can be a huge financial asset.
This asset can be a source of rental income in later years, or home security during your retirement years. Or you could sell it for an appreciated value and make a lump sum to be reinvested.
Of course, this investment aspect is dependent on how the market behaves and whether your property appreciates or depreciates.
The Cons of Buying a Home
Unexpected Hidden Costs
Buying a home costs much more than the down payment and your monthly mortgage payments. Without consulting a robust guide to buying a home, here are some of the costs you might miss:
- Mortgage Interest Payments
- Property Taxes
- Insurance premiums for Homeowners, floods, and mortgage
- Utilities (e.g. electricity, gas, water, etc.)
- Maintenance & Repairs
- Homeowners Association Fees
- Investment Opportunity Cost (the cost of investments you will forego because your money is tied up in your home)
Remember that for the first few years of your mortgage, your monthly payments go towards mortgage interest. You only start reducing the principal well into the fourth or fifth year of the mortgage, depending on your interest rate. Your interest rate depends on your credit, and some credit problems can ruin your mortgage application.
Premiums and maintenance costs can fluctuate widely making it difficult for you to cover all contingencies from the get-go.
Repairs, tenant wars, HOA requirements, contractors, maintenance, building regulations… the list of things to attend to as a homeowner is almost endless.
When Should You Buy a Home?
You Have the Financial Means To Buy a Home
You should have enough money for your downpayment and monthly mortgage payments.
Your budget should also be able to accommodate extra costs such as maintenance, repairs, taxes, utilities, HOA fees, and insurance.
You Plan To Live In Your House Long Term
Buying a home only makes sense if you’re planning to live in it for at least 5 years. In this way, you will have started making a huge dent in the principal of your mortgage and will have started building equity.
Don’t forget the huge outlay of time and resources required to get a home up and running. You should only put these in when you’ll reap the results years later.
Granted, refinancing is always an option and can help you afford a new home. Check out our guide to mortgage refinancing!
You Find the Right House to Buy
Don’t just buy a home because that’s the best one you could find at your price point. In that case, it would be better to rent.
Look for the house that speaks both to your heart and the health of your future investments.
You Want To Be a Homeowner
We can’t reiterate this enough, homeownership is not for the faint of heart. It requires time, resources and is often a labor of love.
Be sure going in that owning a home is what you want. Otherwise, 2 years in it will feel like an albatross around your neck.
Is Renting or Buying a Home Better?
This is but a snapshot of the considerations you need to make before you decide whether you want to sign a lease or a mortgage contract.
If you can find a rental that is cheaper than monthly mortgage payments for a comparable home and you’re not staying for good, you’d rather rent. If you want to put your roots down for the long haul, buying is better.
Neither, of them, is better, it really just depends on your current goals and financial capabilities.