With the home prices down 35 percent since their 2006 peak and mortgage interest rates at record lows, purchasing a home may be more affordable than ever for first-time buyers. It also may be time for some renters to consider buying a place of their own. Whatever the situation, here are some guidelines to keep in mind when deciding between renting and buying.
When to buy or rent. Renters weighing whether buy a home should meet the following criteria: They should be committed to living in the same location for a few years, have a secure job and income, and have saved up enough money for a down payment.
Home prices have improved in some regions, but are still declining in many others. Some prospective buyers are still anxious about the continuing fall in home prices and are jumping into home ownership too early. Also, buying a home before you are financially ready can put a strain on your finances. When housing costs exceed 35 percent of gross income, you'll have to make unsustainable budget cuts to make house payments.
The reality is that everyone with a mortgage effectively pays rent, either to a landlord or to a bank, for the use of their money. Everyone also buys a house, either for the landlord or for themselves.
Advantages of homeownership. The chief benefit is building home equity by paying the mortgage down and, depending on the state of the economy, through appreciation in the value of the property. Of course, if you have an interest-only mortgage and your home value falls before you sell, you can lose equity.
Another benefit is that as an owner, you can remodel, paint, and make any changes that make a house your home. And for most people, owning a home means saving money on taxes because they can deduct mortgage interest and property taxes. Of course, these tax breaks can be offset by increased costs for maintenance, utilities, and insurance.
Disadvantages of homeownership include rising costs, responsibility for maintenance, and having to sell the property if you want to move or relocate.
Generally, owning a house makes sense for people who plan to stay put for several years, can afford the costs associated with homeownership, and can accept the responsibility for maintenance and upkeep.
Advantages of renting. Here are the chief benefits of renting a home:
- Predictable costs -- you'll know what the rent costs will be for the term of the lease.
- Flexibility -- You can move with little or no cost or hassle, particularly when your lease is up.
- No maintenance -- the upkeep and maintenance is the landlord's responsibility.
The disadvantages of renting include no equity build-up, no tax savings, and being restricted in the kind of changes you make to a property. Generally, renting makes sense for people who expect to move in a few years, need flexibility, don't have the necessary cash to make a down payment, or lack secure employment.
Buying or renting: What costs more? When considering whether to rent or buy a home, run your numbers using a calculator like this. The decision involves more than comparing your rent to a mortgage payment.
Say your current rent is $1,200 per month. You are considering buying a home for $275,000. Assume you'll need at least $30,000 cash for the down payment and closing costs, so you'll get a mortgage for $247,500 at a 4 percent interest rate. The monthly payment for a mortgage, property taxes, and insurance will be about $1,600, which is $400 more than your current rent payment.
After taking into account the tax savings (due to mortgage interest and property tax deductions), the monthly mortgage payment, taxes, and insurance amount to roughly the same as the monthly rent. After the equity build-up from paying down the mortgage, over five years the total cost of owning the home is about $60,000, while the total cost of renting is about $75,000.