Should I Buy or Continue Renting?
Home ownership has achieved near mythic status as an essential element of the American Dream. So deeply ingrained has this concept of the American Dream become that it is all too easy to forget that at the turn of the 20th century, just 36.5 percent of Americans owned their own homes. When making the decision of whether or not now is the right time to buy a house, it is important to take the time to separate the facts from the myths relating to home ownership and its benefits.
Isn’t home ownership Always The Best Choice?
When considering renting a home or buying one, there are always two key principles to understand; the practical matters and the matters of the heart. Matters of the heart are quite subjective and vary greatly from person to person. Where one likes a home in the country, the other prefers a brownstone in the city; these are matters of the heart. One prefers a place where the pets can roam and the other doesn't like yard work. These small matters of the heart can have a huge impact on the decision to rent or buy, even thought the person who makes a buy or rent a home decision by looking at just one of the variables is choosing to see only part of the picture. In the end, it may be all she needs to be happy.
However, for the purposes of our analysis, and because no one can determine what is in the heart of another, we'll look first at the numbers and then later at the intangibles, and in the process provide an objective means of answering the question of whether you should buy or rent a home.
Know the Numbers
It's a generally accepted fact that during times of easy credit home ownership rates increase, however access to capital should not be the only deciding factor in whether you purchase a home. To help make that decision you must look at three timelines; the long term, the intermediate term, and the short term. Your analysis of each will determine whether buying a home is more cost efficient than renting.
Consider the following example*
- The renter starts out paying $800 per month with annual increases of 5%
- The homeowner buys a home for $110,000 with a monthly mortgage of $1,000
After Tax Savings
After Tax Savings
Short Term Considerations
For the first three years you'll notice renting provides a significant advantage over home ownership, and a monthly savings ranging from $118 a month all the way up to $200. This is also the period in which you'll be adjusting to home ownership expenses like property taxes, and larger property maintenance bills.
If your budget does not permit the elevated mortgage payment required in the short term, then the few dollars that renting saves you can make a big difference in your life and may warrant that you stay a renter.
Homeownership allows certain tax advantages, and considering them here, yields a small savings after the third year. Still, the $32 savings is barely enough to fill a gas tank.
In years 4 and 5 you'll notice the constant mortgage payment realized through home ownership begins to chip away at the rising rent, such that the savings seen through renting is minimized. The tax consequences make a further push for home ownership, and once realized, can make room for nearly $1,500 per year. That money can be easily applied to property taxes, and other costs of home ownership, such that the by vs. rent question becomes a neutral proposition.
Long Term Considerations
You'll notice that after six years of stable monthly payments the homeowner is now paying less per month than the renter, who has been subject to rent increases each year. This makes a strong argument for home ownership. When you consider the tax savings of home ownership (ability to deduct mortgage interest and taxes), that argument is made even stronger. Here, the homeowner is saving more that $2,500 per year, a number which will continue to rise over time.
Further Advantages and Disadvantages of Homeownership
There are advantages and disadvantages to both renting and owning a home. For the homeowner, you can expect to pay property taxes, higher maintenance costs, and even things like local taxes, school taxes, and city fees. As a renter, you are not responsible for these fees, and depending on the building in which you live, you may not even pay utilities like water, cable, or sewer – all items you will pay separately as a homeowner.
The obvious advantage of home ownership is that you are free to do with your property what you choose. You can paint the walls any color you like, add a room off the back of the home, or even replace the kitchen sink. As a renter, you're stuck with what you have in the apartment, and are rarely able to make improvements or changes of any kind.
However, renting gives you more freedom and mobility then home ownership, especially if you plan to use bank financing to purchase that home. A long term mortgage could lock you into one property for 30 years or more, whereas renters usually sign lease agreements one year at a time. Also, mortgages require good credit, down payments, and stable income and employment. Persons without those things may find it hard to qualify for a loan, and thus may be forced to rent until such time they can qualify for financing. Persons with excellent credit may find loan interest rates low enough to offer a monthly mortgage payment even lower than rent for a comparable property, allowing the homeowner to accelerate his savings.
The size of your family can also have an impact on whether you rent or own a home. Larger families may find it impossible to fit into smaller apartment units, and opt rather to live in a home with room for the kids to play. Smaller couples or empty nesters may find the extra room of a home too much responsibility and opt for a small, more contained unit like an apartment.
When Is Home Ownership The Right Choice?
Making the decision to buy a home is a serious one, and should be made according to the facts, rather than an idealized vision of how life should be. Achieving the American Dream of home ownership is a worthwhile goal, and one that can be achieved with information on current mortgage rates, local market prices, and a careful cost benefit analysis.
1) For many, renting can provide a better home in a better area than they could afford to buy and is cheaper than owning. And, the money saved during the renting period could be saved and invested at a higher rate of return. The period of time spent renting and saving could also be used to repair and improve credit, so that when the time does come to buy a house, it will be possible to get a mortgage with more favorable terms, conditions and interest rates.
2) home ownership right now is not always the best choice. Sometimes, the smarter financial choice is to rent and save, while working towards improving credit and achieving other life stabilizing goals, such as finishing education and progressing in a solid career.
3) There are many advantages to home ownership and in many circumstances it is the smart choice. Often, it is a matter of timing. There are points in the life cycle that owning a home makes more sense than at others.
4) For those just starting out in life, buying a home may be premature, as it is harder to move when there is a house to sell first. Therefore, it may be smarter to wait to buy a home until other life decisions have been made, such as career choices, the area that one wants to live, and whether one wants to marry and start a family.
5) When such life choices are settled, then many of the benefits of home ownership are more useful. Instead of paying rent, the homeowner is building equity. Because that is a process that takes place over time, its value isn’t fully realized unless it is in a place that a person intends to stay for a while.
6) There are a variety of tax advantages attached to home ownership, as well. Furthermore, if you take your time and choose well, and have the added advantage of savings and good credit, owning can work out to be less expensive than renting. Typically, though, accumulating enough savings and building reliable credit are achieved at a later point in the life cycle, rather than being available to those just starting out.
7) home ownership is a smart choice when you have reached a more stable plateau in your life. You’ve decided on a life path and are taking the steps you need to achieve it. You have accumulated enough savings or have reached a point where your income is secure, and the risk of defaulting on a loan and seriously damaging your credit rating is minimal. At that point, the benefits to home ownership outweigh the disadvantages, and you are ready to start shopping for the right loan and home for you.
So...Making the decision to buy a home is a serious one, and should be made according to the facts, rather than an idealized vision of how life should be. Achieving the American Dream of home ownership is certainly a worthwhile goal, but keeping that dream and being able to have the time and energy to enjoy it after you achieve it is just as important as reaching that goal.