For years it seemed most financial advisors promoted the dream of owning a home, but with new home sales at an all time low and foreclosure rates at an all time high, many are beginning to change their tune.
If you are trying to make a decision between renting and buying a home, research the advantages and disadvantages to each, to see which option works better for your current situation. There’s a lot to be said for being able to put equity into your own home. But there are also many advantages to signing a lease instead of a mortgage. Renters enjoy the worry-free aspects of renting and don’t have the responsibilities that go along with owning a home.
Key advantages of renting:
A key benefit of renting is flexibility. This flexibility helps if you’re in a career that might require you to change locations, as is often true for people just starting out. Even if you have to move before your lease is up, you’ll probably lose less money than you would trying to quickly sell a house.
- New homeowners may be prepared to pay a mortgage, but they frequently get blindsided by such additional costs as homeowner’s insurance, flood insurance, private mortgage insurance (PMI), property taxes and home repairs. When you’re renting, your monthly costs should be limited to rent, utilities, and renters insurance.
First-time homebuyers frequently have to look at older houses which may need updating or lack more modern fixtures. If you prefer a more clean-looking, modern space with all updated appliances, you’re probably better off renting than trying to furnish a house or paying for a house where the kitchen and bathrooms have already been renovated.
- Broken dishwasher? Air conditioning system in need of a new filter? One benefit to renting is that calling your landlord to get these things taken care of can be much more convenient — and inexpensive — than fixing it yourself. Homeowners are frequently advised to expect to spend 1% to 2% of the purchase price of their house in annual maintenance. As an apartment renter, you typically don’t have to assume any additional maintenance cost.
- Many apartment communities include such amenities as a fitness center, which can save you gym membership fees; a swimming pool; covered parking to protect your car; and a club room to host parties. For many renters the amenities of an apartment community add convenience.
- You may sign a lease and discover soon after that your apartment is overpriced for the surrounding area. But that’s small potatoes compared to being “underwater” on your mortgage because your home has dropped so dramatically in value, as has happened to millions of American homeowners in recent years.
As many homeowners will tell you, getting a house in shape to sell can be difficult and painful. When you’re finished renting, you just have to make sure the place is clean and the keys are turned in, and your obligations are finished.
Key advantages of owning:
- When you carefully choose a house you can afford, the outcome can be significant: By paying your mortgage, you are building equity in a place of your own. Equity is the portion of the property that you actually own. Equity increases by paying your monthly payments, and your home may also appreciate in value over time.
- The Equity you build can be used to secure a loan or obtain a line of credit, meaning more buying power to fund home improvements or to assist with the purchasing of big ticket items, or even for emergencies.
- Tax Advantages: As a homeowner, you can deduct on your federal and state income taxes the amount of mortgage interest and real estate taxes you pay each year if you itemize deductions.
- A first home often leads to a better second home. Owning and properly maintaining the property also offers a sense of accomplishment.
- When you own a home you have the power to make decisions on paint colors, landscaping options, upgrading appliances—everything!
- Home owners with fixed-rate mortgages have a sense of stability of knowing what their payment will be for the next 15-30 years; however, renters usually don’t know what their rent will be when they renew their lease.
- Homeownership offers greater anchoring to your community. When you own your home, and you’re paying taxes on it, you might have your voice a little better heard when it comes time to speak up about neighborhood or community issues.
- Retirement Savings: Long-term home ownership can provide beneficial retirement security through the growth of equity. Today, many seniors are looking at reverse mortgages as an additional option for retirement income.
Renting compared to buying
|What You Pay For||Rent
(and possibly renter’s insurance)
|What You Can Deduct on your Taxes||Nothing||* Interest on mortgage, PMI, and property taxes (only if you itemize on Schedule A instead of taking the Standard Deduction)
* If it’s rental property, you can also deduct insurance, maintenance, and depreciation on the portion rented, whether or not you itemize. If it’s a duplex and you live in half and rent the other half, you can deduct half of these costs.
* When you sell your home, you don’t have to pay any taxes on the gain, in most cases.
|How you can build an investment||
Take the money you would have spent on a down payment for a house and on high monthly mortgage payments, and invest in something else instead. However, this is rarely as profitable as buying a home.
Your house is your investment. Part of each monthly payment builds equity in your home. Your house also gets more valuable over time just by sitting there, which is called appreciation. There are three ways you can capitalize on this investment:
(1) Sell your home, even before it’s paid off, and receive the equity you built.
(2) No longer have to make mortgage payments once the loan is paid off.
(3) Any time after you’re 62, get a reverse mortgage, which pays you most of the equity you’ve built in cash, either as a lump-sum or as monthly payments. You don’t have to repay this as long as you live in your home, your heirs do. (They can either sell the house to pay off the reverse mortgage, or move into the house and start making monthly payments.)
|How you could screw up this investment||Fail to invest your extra money somewhere else. In that case, you have no investment.||
Possible mistakes include:
* Pride and satisfaction in owning your own home.