Buying vs Renting: Which is Right for You?
When it comes to living arrangements, deciding whether you should rent or buy a home is a tough call especially if you can afford to go either way.
This is because it is a decision that affects every aspect of your life from the length of your daily commute to your financial health.
But while owning a home is often seen as the best option, it’s not the case for everyone. In this article, we explore the pros and cons of buying and renting to help you make an informed decision.
Renting
Renting a house is sometimes seen as a waste of money because you don’t get ownership of the property.
However, it is one of the smartest things you can do to live well within or below your means as you build your finances or work on other goals.
Pros
No down payment
Unlike home buyers, renters don’t have to make a down payment [(3–20%) of the cost price of the home]. The only thing they are required to pay is a month’s rent upfront and a security deposit or caution fee (a deposit if the renter causes damage to the property).
In New York for instance, the standard down payment on all listings is 20% and the average price of a home per Zillow.com is $411,304 which means you will have to make an $82,260.8 down payment.
Meanwhile, the average cost of a rental in New York is around $4,250 dollars.
No maintenance costs
If there’s a problem with the plumbing, roofing, electricity, or any other amenity the landlord is legally required to repair it.
As a renter, you will bare zero cost of repairs. And if you carry out repairs you can deduct the cost from your rent.
Flexibility
With a rental home, you can up and leave whenever you want without having to bother about selling the home, closing costs, mortgage arrangements, or losing the homeowner’s equity.
You can move cross country for work, right next door, to a better apartment across the street, or a better neighborhood.
Access to otherwise costly amenities
Most apartment complexes have various amenities such as swimming pools, hot tubs, and gyms which are available to renters at no additional cost.
Cons
Zero freedom to modify
To successfully modify the interior or the floor plan of your rental home, you would need your landlord’s consent.
As a renter, you would not have the right to change the paint, wall structure, paint color or make any other major change to the apartment.
Landlord could raise the rent or sell impromptu
A downside to the flexibility of a rental property is the landlord’s flexibility to increase rent or sell the property without prior notice.
This could pose a problem either in the form of coming up short in funding or being thrown into a rushed home search. And neither of the two is a fun experience
No homeowner’s equity
As opposed to homeownership where every mortgage payment you make increases your homeowner’s equity (the amount of debt on the house minus the total payments made by the homeowner), your rental payments do not add up to any equity on the property.
Buying
Although it’s not the right step for everyone and there are many factors to consider before committing to buying a home, it is an absolutely terrific move if you have the right financial setup for it.
Pros
Stability
Unlike rentals where the landlord can sell or up the price of the rent without consulting you, you call the shots as a homeowner.
Meaning, no one can sell your property or spike your rent without consulting or notifying you.
Freedom to modify property
As a homeowner, you can choose to remove or put up a wall, change the paint color, and install as many appliances as you deem fit. In fact, you can make any changes you want to your property.
Although, some changes will be subject to the consent of your homeowners’ Association.
Homeowner’s equity
Homeowner’s equity is a fancy term that represents your percentage of ownership of the home in comparison to your mortgage debt. With every mortgage payment, you make your ownership of the home increases.
You could use this as leverage to sell the home or to get another mortgage to buy another home.
Increase in property value
When the value of the home increases you make more money on your initial payment for the home.
Cons
No flexibility
As a homeowner, you can’t up and move cross country or abroad.
Any moves would have to be extensively planned, with consideration on whether to sell or rent out the place.
Fluctuating mortgage rates
Interest rates on your mortgage will rise and fall according to market trends and new policies.
This means it could rise at a time that is not convenient for you and put a strain on your finances.
Down payments
You will be required to make a down payment on the property which is usually about 3 to 20 % of the total cost of the home.
If the home costs 200,000 for instance and you’re making a 3% down payment you would be paying 6,000 and for a 20% arrangement that’ll be 40,000.
Maintenance cost
As a homeowner, you will be responsible for maintaining the house. From repairs to replacements and updates, you alone will have to bear the costs
Money could be lost if the property loses value
On the flip side of the property increasing in value, it could also decrease in value leaving you at a loss if you want to sell the home.
Closing costs
This is due at the end of the purchase process and it ranges from 3%–6% of the purchase price for the seller. Thus, if you buy a $200,000 house, your closing costs could range from $6,000 to $12,000.
It includes loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges.
Other factors to consider
After considering these pros and cons above you may also want to consider:
The timing of the market
If you’d like to go the homeowner route then you may want to consider mortgage interest rates and if it’s currently a seller’s market or buyer’s market.
How long do you plan to stay there?
Regardless of whether interest rates are ridiculously high or low, or if it’s a seller’s market or a buyer’s market, you can only really reap the benefits of buying a home in the long term like 5 years and above.
So if you plan to live there for 1–5 years or less, you may want to consider renting.
The degree of stability in your work and private life.
Are you in a stable job or are you thinking of moving away for a job opportunity?
Are you going to get married soon?
If you are already married, are you looking to expand your family?
All that being said, don’t rush into any agreements. Instead, think carefully before you make any decision because your financial health depends on it.