Home ownership has long been synonymous with the American Dream -- an outward sign of success, stability and financial prudence. Or is it?
According to a USA Today analysis of U.S. Census data released earlier this year, since 2006, the number of households that rent has grown by about 700,000 a year, while the number of households that own has dropped by about 200,000 a year. So why are more and more people opting to rent and fewer and fewer people opting to buy their homes and what does that mean for you?
Deciding whether it’s best to buy or rent a home is not an easy decision. It is important to weigh the financial pros and cons of each option. There are several online rent-to-buy calculators that can help you analyze the financial impact of buying versus renting. They calculate items such as rental payment, the price of a home, the mortgage and tax rate, and estimate whether you would save more by renting or buying a home. But deciding whether to own or rent your home may also depend on your lifestyle, so it's a very personal choice that should take into account more than just the numbers.
Pros and Cons of Buying
Buying a home offers many advantages. If you buy, you can build equity (the positive difference between the price you pay for a home and the home’s market value) over time. You can also benefit from tax deductions on real estate taxes and mortgage interest. However, there is a direct correlation between the financial benefits of home ownership and the amount of time you plan to live in the home. In the short term, owning a home will often require you to adjust to higher monthly payments and home ownership expenses like property taxes, and larger property maintenance bills. These increased expenses lead some experts to suggest that if you are planning to be in a home less than three years, renting makes better financial sense.
If you plan to reside in a home for longer than three years, a purchase can provide some significant advantages over renting. After several years of stable monthly mortgage payments, a homeowner is often paying less per month than a renter, who has been subject to market driven rent increases each year. That savings can be easily applied to property taxes, insurance, homeowners’ association dues and other costs of home ownership.
On the other hand, if your mortgage payment would be triple the amount (or more) that you would pay to rent, it might not make financial sense for you to buy. For example, if it would cost you $2,000 a month to rent what would cost you $4,000 per month to own, consider whether it makes sense to pay $24,000 a year more to own a home. Also keep in mind that you may have to borrow heavily and pay interest on a mortgage in order to afford a home purchase. You could lose your house, your equity and your good credit if you purchase beyond your means and cannot keep up with your mortgage payments.
And then there are the other considerations. There are points in life when owning a home makes more sense than at others. If you are just starting out on your own, buying a home may be premature because it is harder to move if you have to sell your house first. So you may be better off if you wait to buy a home until critical life decisions have been made, such as career choices, the area in which you want to live, and whether or not you want to get married and start a family.
If after considering all factors, you decide to purchase a home, you will reap some important lifestyle benefits. You will have more control over decorating, landscaping and maintaining your property. You can also achieve a bit more life stability if you own because, as long as you can afford to keep up with mortgage payments and property taxes, you don’t have to worry about a landlord who might terminate your lease or evict you. Keep in mind, however, that when it comes to maintaining a home, the buck stops with you. Instead of being able to call your landlord or property manager when a toilet leaks or an appliance goes on the fritz, if you own your home it will be up to you to make and pay for the repairs.
Pros and Cons of Renting
If you decide that buying is not for you, renting can provide significant advantages. For starters, you may be able to afford a better home in a better area if you rent rather than buy. It is often cheaper to rent in the short term than it is to own. The money you save during the renting period could be saved and invested at a higher rate of return than you would get on real estate appreciation. You can also use the period of time you spend renting and saving to improve or repair your 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.
If you rent you are not required to save up a large down payment and renting is normally a short-term commitment. You can typically sign a lease for as little as a few months to a year. Since you are only obligated to short-term lease, committing to a particular rent amount isn’t an overly painstaking decision.
And don’t forget the headache avoidance factor. In a rental, you are usually free of major maintenance costs and property tax payment obligations -- your landlord pays those. Also, your landlord often handles major maintenance tasks for the home and you probably can escape responsibility for tiring duties like mowing the lawn or shoveling the snow. Some people consider these advantages to be priceless.
This does not mean there is no downside to renting. If you rent a home you aren't building equity (the value an owner has in a piece of property minus the debt against it). You also cannot take advantage of tax benefits like tax deductions for mortgage interest and property taxes that are only available to homeowners. You may be subject to rent increases that you can do little about.
Additionally, you might not be able to decorate a rental property as you would like to, which means you may be stuck with sterile white walls and beige builder grade carpeting. Your landlord may also impact your lifestyle by imposing restrictions on pets, guest parking or activities (that means no throwing loud parties or dancing and jumping around to deafening music whenever the mood strikes you). In a rental, you are dependent on the landlord to maintain the property and keep things in good working order. This is especially problematic if the landlord does not have high standards for maintaining a property. While renting enables you to have a certain amount of freedom and flexibility, there are some drawbacks to renting that should be weighed carefully before you make a decision to live life as a tenant.
Deciding What is Right for You
Achieving the American Dream of home ownership is certainly a worthy goal, but buying a home is a huge commitment. Your decision should be based on a determination of your personal and financial goals, a review of information on current mortgage rates, local market prices, and a careful cost-benefit analysis. If you do the homework up front, you are more likely to make the right decision for you.