Should you rent or buy your own home?
Should you rent or buy your own home?
A growing number of Americans, called a new class of of rent or buy, can afford to buy a home but are renting by choice. In August, 72% of people said they feel that homeownership is part of their American dream, down from 77% in January, according to a survey by Trulia.com. One out of four renters said they never plan to own a home.
In the past, rent or buy tended to be college students and young married couples who were saving money for a home down payment. Now many older families who have been homeowners for years are returning to the rental market.
No wonder some people are sitting on the fence, trying to decide if it’s better to rent or buy. Consider a married couple who has three children, has been a renter since they sold his home in about two years ago and used the money to expand his business.
They wonder if my business is now stable enough to buy a home who builds homes and provides technical programming for Latin American companies. Instead of putting money into a down payment, he may keep investing in the business — for at least another year.
Whether you decide to rent or buy, each has many pros and cons to consider.
Pros and cons of calculators
There are many free, online rent or buy calculators that can help people weigh their financial options. They may help you focus on the differences. But they go only so far.
They add up 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 the calculators don’t include the same items, and they can come up with different results. They also generally ask how much a home will appreciate in value each year, which is now hard to estimate.
Also, online calculators don’t tell people about all the hidden costs of homeownership, according to a University of Georgia study released last year. That especially hurts lower-income people, who tend to buy older homes that need more repairs and are less energy-efficient, says Russell James, a co-author of the study who is an associate professor at Texas Tech University.
Pros and cons of rent or buy
- Renting can be easy. You pay your rent, and someone else has to take care of the property. In the past, apartments and condos were the primary rental options. But now single-family homes are more available.
- Many homeowners who can’t sell their homes have become landlords. And some investors have purchased foreclosed homes and turned them into rental property.
- If the rental vacancy rates are high, you may be able to negotiate better deals. Some landlords have been willing to offer incentives, including flat-screen TVs, tickets to sporting events, free parking or a lower deposit.
- But keep in mind that a landlord may not approve you if you have bad credit. Check your credit report before you apply to make sure there are no errors. If you have a low credit rating, you need to plan how you will explain it.
If you have less-than-perfect credit, it also helps to show that you have a stable job, are willing to put down a deposit or will sign up for an online rental payment that comes directly out of your bank account every month.
Renting has some disadvantages. There are often many rules. Landlords may not allow pets, or they may not let you paint the walls a different color.
Pros and cons of homeownership
- Buying a home is riskier than it was before the housing bust, when homes appreciated every year.
- It is certainly a legitimate form of investment, but it’s not necessarily the first thing to think about when you’re buying a home.
- Home buyers now need to better educate themselves about the costs of ownership. For example, maintenance is unpredictable. You may suddenly discover that you need a new roof or water heater.
- And home buyers often spend more than necessary to spruce up the home. You get into this nesting syndrome which is part of the fun of owning a home, but it costs money.
- Buying a home seems much more costly than renting. But as a renter, you are just giving away your money, the experts say. As a homeowner, you get a mortgage tax benefit and, in the long run, you are building equity in your home.
Pros and cons of different cities
In some cities, it is much cheaper to rent than buy. But in another city in the same state, it could be less expensive to buy than it is to rent.
Trulia.com provides a quarterly Rent vs. Buy Index that is based on the 50 largest cities. For example, two cities in Texas are in the top lists: While Arlington, is the best city in which to buy a home, Fort Worth is one of the best cities for renting.
The ratio is determined by multiplying rent times 12 months and dividing that figure into the average list price. A low ratio indicates that it’s less expensive to own than to rent. The rent-vs.-buy ratio is a good benchmark for making a decision. But there could be neighborhoods that don’t match the city’s ratio. And the rent-vs.-buy ratio alone should not drive your decisions. Consider the short-term and long-term financial implications. Home prices and mortgage rates may be a great deal, but mortgage lending policies are also much tighter now. Mortgage lenders will need to know how stable your job is.
In the end, deciding whether to rent or buy a home has much to do with your own interests and personality. By selling my house and renting a home, you would not have to deal with maintenance. “I’ve replaced my air conditioning twice. I don’t really want to do it again.”