Weighing the pros and cons between renting a home and buying one of your own? You’re not the only one! With rent prices skyrocketing across much of the US and mortgage rates staying low, a lot of people are starting to reevaluate their housing situation. In today’s post, we’ll explore buying vs renting and point out some of the most common pros and cons.
Renting – Pros:
Renting a home provides a little more freedom than what you’d get from owning. You’re still required to sign a lease – which is a legally binding contract – but they’re usually only for a few months or a year at a time. By contrast, a mortgage is typically structured for 10, 15 or 30 years!
When you’re a renter, you usually don’t have to worry about things like patching a roof, repaving a driveway or replacing the A/C unit. Those things are on the homeowner. If you live in an apartment, condo, or a house that has lawn care included in the HOA, you’ll enjoy getting out of mowing the grass, too!
We’re using the term “free” loosely here. Nearly all “free” amenities are actually built into the cost of your rent. Still, it’s nice to have access to things like a pool, gym, tennis court, playground, or walking trails without having to venture beyond your community. Also, some landlords offer “free” services or utilities to entice tenants during slow times. In these cases, you might score free WI-fi, free trash pickup, free basic cable, and so on.
Renting – Cons:
In today’s market, rents are beginning to far exceed the cost of a mortgage – at least for some people. It depends on where you live, of course, but overall it seems that it makes more financial sense to buy than rent. Here’s a look at some figures to illustrate our point:
- According to the National Rental Price Index (June 2016), rents have increased by 2.7% between May 2015 and May 2016.
- The median price for a 2-bedroom apartment in the U.S. is currently $1,330, while 1-bedrooms are $1,180.
- The 5 U.S. cities with the highest rents are San Francisco, CA; New York, NY; Jersey City, NJ; Washington, DC; and Boston, MA.
- Rounding out the top 10 are San Jose, CA; Los Angeles, CA; Miami, FL; Stamford, CT; and Seattle, WA.
- Median Monthly Gross Residential Rent in the United States (2014) – $934
- 1-Year Change – +3.43%
3-Year Change – +4.83%
- At $934, real median gross rent in the United States was at its highest level since 2005.
- Average Gross Rent in the United States (2014) – $992
- At $992, real average gross rent in the United States was at its highest level in 2014 since 2005.
No Wealth Creation/Equity
When you own a home, your mortgage payments go toward repaying the loan, but also toward an investment. If the value of your home increases, your investment has the chance to grow. You can build equity in the home and eventually sell it for a profit. With a rental home, you don’t have any ownership rights so if the property goes up in value, you don’t benefit at all. In fact, you’ll probably just end up paying higher rent when you renew your lease.
When you rent, you won’t be able to customize your home in all the ways you could if you were the owner. For example, you won’t be able to remodel the bathroom, install skylights, or even paint the walls certain colors. Even if you have a really laid-back landlord who is willing to let you do these things, why would you want to anyway? You’d be paying out of your own pocket for improvements and not getting any of the financial rewards.
Buying – Pros:
As we said before, when you own a home you’re putting money toward an investment that will hopefully pay off down the road. As long as you continue making your mortgage payments and your home increases in value over time, you will be able to build equity and therefore get a higher return on investment when/if you decide to sell.
Freedom to Customize
Want to install a backyard pool? Or knock out a kitchen wall? Go for it! As an owner, you can pretty much do whatever you want. There are a few exceptions, though. Homeowners who have HOAs may have to follow certain rules (like not constructing certain types of fences, for example), and there are certain zoning restrictions that prevent some homeowers from building large additions, but for the most part, if you own your home you can do what you please with it.
When you have a mortgage, you’ll pay a considerable amount of money in interest, especially in the beginning. That mortgage interest is tax-deductible, which can provide a huge financial bonus to homeowners every year! Of course, the tax break shouldn’t be the only reason you get a loan, but it certainly helps sweeten the deal.
Buying – Cons:
It’s a Risk
Buying a home is an investment, and investments aren’t always guaranteed to provide a good return. Real estate, although one of the safer investments you can make, is still a risk. As we learned from the 2005-2007 years, home values don’t always go up. And, even if the housing market is rock solid, issues with our personal/financial lives can make it difficult to see a good return on investment. Things like getting a divorce or losing a job can present a challenge when it comes to affording the investment.
Nevertheless, buying a home is still considered a good investment by most financial experts, especially when market conditions are as favorable as they have been lately. Low mortgage rates, reasonable home prices, and increased consumer confidence has helped boost the housing industry and real estate market across the nation.
Could now be the time to look at your own financial picture and see if buying makes sense for you? If you need a helping hand, our home financing professionals at Luxury Mortgage are only a phone call away: 888-379-0303 or complete our quick start form here.