Across the country, the cost of rent is rising exponentially. Conventional wisdom would suggest that rent is wasted money you could put toward owning your own home. Meanwhile, following the 2008 housing crash, lenders are easing credit standards to encourage consumers to seek mortgages. So it's easy to think this is the time for everyone to buy property. In reality, the answer is not so cut and dry. There are many things to consider when you decide whether to purchase a home or rent instead.
Renting offers greater flexibility, and is generally cheaper in the short term.
- Not my property, not my problem. When you don't own your home, you're spared a lot of responsibility. Most landlords will cover a portion of the utilities, and some will cover all of them. I've even seen the rare rental that will include cable or internet. Furthermore, when you're renting, the landlord is responsible for all maintenance and repairs. Especially with apartments, you often don't even need to be home because you can give the property manager permission to enter with the repairman in your absence.
- Enhanced flexibility. Even if you sign a lease, you are usually only committed to stay for one year at a time. If you really need to break a lease, it's relatively cheap, generally costing you one month's rent and/or your security deposit. If your income or employment situation may change soon, frequently or at a moment's notice, the value of this benefit can't be overstated. This freedom is also incredibly valuable to any of us with a healthy wanderlust.
- Saving money. If you aren't ready to settle down yet, renting can actually be cheaper than buying. All of the additional upfront costs of buying a home mean that owning doesn't actually start to save you money for a few years. People like to say that 5 years is the benchmark, but the exact number depends on a lot of different factors.
- Bad credit, no credit? Don't worry. If you're currently in the process of building your credit, renting is probably a better choice. A low credit score can make it difficult to qualify for a home loan, and if you do qualify with low credit, a higher interest rate will increase the cost of buying. This can make repayment more difficult and put you in a high-risk credit building situation. There are many safer and easier ways to build your credit while renting, and taking time to build your credit now can make purchasing a home in the future easier and cheaper.
- Investment potential. If one of your primary interests in owning a home is as an investment, you may be better off renting and investing the extra money that would go towards purchasing a home into traditional stocks, which generally have a higher return on your initial investment than a home.
Purchasing a home can provide a comforting sense of stability and independence for people who are ready to lay down their roots in one location, and can save them money in the long term.
- Freedom of choice. When you own your home, you're in charge. This increases your financial and personal responsibility in terms of maintenance and utilities. However, it also increases your freedom. If you want to paint the bathroom, knock down a wall or add a guest room you can do it. The space is entirely your own.
- Saving money. If you know that you're settled and plan to stay in the same area for the rest of your life, or at least a very long time, buying will probably end up saving you money. As mentioned, the threshold for when you start saving depends on a lot of different factors. Owning a home also earns you some tax breaks. Your biggest break will probably come from deducting the interest on your mortgage. Many home expenses are also tax deductible, although you'll probably need to itemize your deductions to take full advantage of this, which can make your taxes more complicated.
- Building a legacy. Owning your home can provide a sense of pride and security. If you do end up staying on your purchased property and paying off your mortgage, your home will belong to you, and you'll have the ability to pass it on to loved ones. This makes your home much more than just property or an investment. This makes your home something that you can rely on, and a way to help provide for the people you care about.
- Investment potential. For those of us who don't have the discipline and time to invest in stocks, being accountable to pay a mortgage every month forces us to invest in our property. If this applies to you, buying a home can earn you more than the money you could invest in stocks, but just seem to keep spending on other things.
Try out our Home Affordability Calculator to figure out how much you can afford to pay for a house.
So should you rent or buy?
Whether you should rent or buy depends on your unique personal and financial situation. If you're still building your credit and your career, trying new cities or just in a general state of transition, you'll probably benefit most from the flexibility and low commitment of renting. If you're well established in your career and your community, with no foreseeable plans to skip town and the sense of stability appeals to you, it might be time to buy a home.
Before making your decision, it's good to really understand where you are currently and what your most important goals are. Make sure that whatever choice you make is ultimately going to help you get where you'd like to be.
About the Author: Laura Ross has been a Member Support Specialist at Credit Karma since December 2013. She can usually be found riding bikes around town late at night, communing with animals and eating sweets.
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