Choosing whether to buy or rent a home is a big decision—and it's not always about dollars and cents. While money is certainly a large part of the choice, emotional reasons—pride of ownership, the desire to put down roots—can certainly influence whether to buy or rent. Here are some things to consider before making the big decision.
Am I ready to buy a home?
Are you settled in the community where you want to live or not quite ready to put down roots? While owning a home can be an exciting responsibility, to make it worth your while—financially and emotionally—you should consider it a long-term commitment—for several years, at least. On the other hand, renting may be a great option for you if you're looking for the freedom to stay put or explore new territory. It allows you the option of a short-term residency without the limited flexibility that can come with home ownership.
When you're ready for home ownership, it's important to consider a place that can meet your lifestyle expectations and your financial responsibilities. A home you like can become the foundation for your future—a place where you can put your own stamp on your surroundings with paint, remodeling, or landscaping. But foundations sometimes need repair and houses may need sprucing up, and you may not always be ready to take on such a big project. Know what you're getting into—emotionally as well as financially—and make sure you've saved enough in an emergency fund to help pay for expenses that may pop up.
Can I afford to buy a home?
Make no mistake: buying a home can be expensive. Although many people talk about how nice it is to take a mortgage deduction on their taxes, that deduction is often outweighed by the additional costs of homeownership, including property taxes, insurance, association fees, repairs, and maintenance. In addition, because the mortgage deduction allows you to deduct interest payments from your taxes—which are higher in the early years of a mortgage—the tax deduction will decrease over time as your interest payments decrease. And of course, in most cases you'll need to come up with a significant down payment to qualify for a mortgage.
What are the costs I should expect when renting or buying?
If you choose to rent or buy, costs will vary depending on the type of residence you select. Consider the costs of owning versus renting:
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While the points above focus on costs, there may be financial benefits. If you sell your house in the future, you may gain from any appreciation in the value of your home. However, as many people have found in recent years, if you want or need to sell when your home is worth less than your outstanding mortgage, the financial repercussions could cause your credit to suffer for years.
Also keep in mind that there are new federal regulations for home ownership that will help protect consumers from unfair mortgage requirements. Lenders are not allowed to issue mortgage interest rates that are unnecessarily excessive, and they are also required by law to disclose the way payments from borrowers may vary over time. Expenses due at the end of a loan term will be more explicitly advised as well.
Where do I get help?
It's a great idea to review your finances with a financial planner to decide whether you're financially ready to purchase a home. He or she may also help you create a payment schedule for expenses like a mortgage, property taxes, and other household costs to help you prepare for your future expenses.
Of course, if avoiding unexpected repair costs and being able to anticipate your monthly expenses with some certainty are very important to you, leasing a home or apartment may be more appealing, at least in the short-term. The lease you agree to will outline your financial responsibilities, but your landlord will be accountable for taking care of residency problems or issues. Before you sign any contracts for a rental residency, be sure you understand what will be expected of you financially.
Taking the plunge
When people talk about buying a home—either their first home ever or their first in a new city—they sometimes talk about “taking the plunge.” It's rarely the same when they rent. Remember, owning a home is a significant commitment of money and patience. Be sure you're willing to stay put for a few years, at least, and know what you're getting yourself into before diving into home ownership.
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Build a future that fits
Whether you’re looking for flexibility or ready to settle down, understand the tradeoffs of buying versus renting your home.
