Disclosure: As an Amazon Associate I earn from qualifying purchases. This post may contain affiliate links, which means we earn a commission when you purchase through these links.
It’s quite a conundrum whether to buy or rent a house. An ongoing debate always arises on which is the best financial decision of the two. Buying or renting are both good ideas so it’s quite confusing. Note that, recent changes in the tax law have made buying a home less advantageous financially. Therefore, the dispute continues on whether to buy or to rent.
Most people choose to buy a home because they would rather build equity in their own homes rather than paying monthly rent to a landlord. Of course, many financial reasons exist to make renting a house compelling. For instance, you must be sure that you are in a good position financially to buy a home.
On the other hand, if your professional, social and financial lives are not in order, you shouldn’t think about buying a home. Well, here are some important considerations to make when it comes to buying or renting a home.
1. Owning A Home Can Be Very Expensive
The exact cost of owning a home might be much more than anticipated. Most people believe that owning a home is more sensible than renting one. Yes, it might seem ideal for now but there are many things to consider.
First, you shouldn’t think of paying rent as a waste of money. Yes, you will never see that money again but you are getting something in return. That is shelter for your family and yourself. If you buy a home, you will end up spending more money in interest payments, fees and taxes. That’s actually money you will never see again. These payments are not helping with building equity. Owning a house isn’t as easy as it seems.
Secondly, if you are thinking of actually owning a house, you need to have a realistic view of the expenses associated with it. Upon first glance, the mortgage payment might seem less than your monthly rent. However, it’s just the start. There are many more costs which amount to more than half of the mortgage payment.
Here are some of those home ownership expenses to consider when you are thinking about buying a house. Don’t forget to account for the cost of buying new furniture, equipment, upgrades and much more.
One time (non-equity) home ownership costs (6 to 12% of the value of the home) which include the following:
- Mortgage origination fees – It is an upfront fee charged by mortgage lenders as part of processing a new loan.
- Closing Costs – They include property taxes, escrow fees and interest
- Realtor/Lawyer Fees – Usually comes up if you are planning to sell your home
Annual ongoing (non-equity) home ownership costs include the following:
- Mortgage interest payments
- Homeowner’s insurance (HOI)
- Property taxes
- Utilities such as gas, water, electricity, etc.
- Flood insurance
- Mortgage insurance if the down payment is less than 20%
- Maintenance and repairs
- Condo and homeowner’s association fees
Finally, there is investment opportunity cost. It refers to the cost of foregoing investments since your money is tied up in a down-payment or any other expenses that might not be present if you were renting a house.
2. In The Long-Term Renting Is Cheaper
Rental company, Direct Appliance Rentals say “once you come across the long list of expenses, you will find that in the long-term renting is cheaper compared to owning a home”. They suggest, “it’s not a good idea to buy a home if you are not planning to live there for more than 5 years”.
You might be wondering why this is something to consider and here is a good answer.
Take an instance where you buy and own a home for at least 30 years. When you finally choose to sell the home, the closing costs will be offset by the value of the home over the 3 decades. However, if you own the home for 4 years, the value will not increase. It’s most likely that the value will have decreased. That means with the closing costs, you will end up losing the money on your investment.
Note that, the payments at the beginning of the mortgage loan are disproportionate to the interest and not to paying down the principal balance (when building equity). It will obviously be a very bad investment for you. If you want to determine if renting or buying a home is a good financial decision, you need to compare the overall cost of renting a home to the cost of owning one.
Don’t forget to take into account the benefits accrued if you choose to sell the home. There are also some tax deductions associated with owning a home. Well, it might seem a little complicated but it’s actually very easy.
3. Calculate The Difference Between Renting And Owning A Home
It’s very easy to ascertain the difference of the cost of renting and owning a home. Thanks to the calculator published in 2014 by NYTtimes, people can now calculate whether they want to rent or own a home effortlessly. Use accurate assumptions to get accurate results when calculating.
Remember, the laws have changed since 2014 so there’s a chance you can’t claim all the tax deductions as before. It’s tough to ascertain how long you will own a house or whether it will appreciate in value so your best judgement comes in handy.
With the calculation you should be in the right state of mind to decide whether to rent or buy a home. Don’t forget to evaluate all the other factors in your social or professional life. That way, you can make the decision to buy or rent after considering everything!