How to Decide Whether to Buy a House or Rent
Deciding Whether to Buy a House
The collapse of the housing market in 2008 forced many homeowners into the rental market. Because of this, demand for rental units is increasing, driving prices higher. In fact, rents are expected to increase 6% over the next year nationwide, according to MPF Research. At the same time, home prices are down 29% from their peak and still dropping, making home ownership more affordable than in recent years. Under the current circumstances many people are wondering, ‘is now the time to buy a house or should I continue renting?’ It’s not a clear cut decision. Factors to consider include the length of time you intend to stay in a house, financial implications, and various personal and emotional factors.
Your Time Horizon for Home Ownership
The first factor to consider when deciding whether to buy a home or to keep renting, is how long you intend to stay in a home if you buy. This factor is closely related to the financial implications of owning vs. renting. With the steep transaction costs involved in purchasing a home, experts say you’ll need to stay in the home for at least 5-8 years to make it worthwhile. So before you buy, make sure you’re in a solid relationship (divorce is one of the reasons people end up moving), have a job you can be reasonably sure will be there in the long term, and are committed to staying in the area you choose. For example, if you plan to have children, you should buy in an area with a school district you can live with for the long-term. Otherwise, you could end up moving to a new area for the school district.
The Financial Implications of Home Ownership
The second factor to consider when deciding whether to buy a house or rent is the steep cost of home ownership. Many people have been told that home ownership is the best financial choice because you’re not “throwing your money away on rent,” and you get a tax write-off on the mortgage interest and property taxes. However, given the many costs of home ownership compared to renting, these benefits don’t always outweigh the costs. Someone who has never owned a home before will have a difficult time imagining the many costs associated with it. First, there’s the steep down payment and closing costs. Then, you’ll have a monthly mortgage payment, including insurance and property taxes, which is likely to be higher than what you pay in rent. Finally, you’ll have the on-going costs of decorating and purchasing furniture, maintenance and upkeep for replacing a dishwasher here or a water heater there, and higher utility payments.
So before buying, make sure that you have enough cash to cover a 20% or more down payment plus closing costs and a cushion for moving expenses. When I moved into my new house, I had to replace the dryer and dishwasher in the first week. That was a surprise! Also, make sure that you can afford the likely higher monthly payments and maintenance expenses. You can factor in the tax benefits of owning a home if you like but in my opinion the tax benefits shouldn’t be the primary reason to purchase. They also shouldn’t be a reason to purchase a more expensive house than you can afford just to increase your deductions. This is just an example of spending a dollar to save twenty-five cents.
If you find that you can afford the house and on-going payments, then go for it. There is definitely some truth to the saying of throwing your money away on rent. After all, with each mortgage payment, you’re paying down the principal on your loan and building equity in your home (assuming home prices remain stable or increase). You don’t get that benefit from renting. In addition, once you lock in a thirty year mortgage, your payment remains relatively constant except for increases in insurance or property taxes. When you rent, you’re at the whim of the landlord when it comes to your rental amount. It could increase every year!
The Personal and Emotional Considerations of Home Ownership
Finally, we wouldn't be human if emotional considerations didn't play into the decision to buy a house. Regardless of whether or not you pass the time and financial tests above, you still may or may not want to purchase a home. Let’s say you can afford the house and you’ll be staying there for at least five to ten years. However, your work keeps you so busy that you wouldn’t have time for the upkeep and maintenance of a home. In this case, you could decide to continue renting. There’s something very carefree about not having to worry if something needs fixing where you live. On the other hand, you could also get into a townhome or condo and pay a fee for maintenance.
Emotionally, home ownership is probably the quintessential American dream. Some would say that even if the house is a little beyond their reach financially, it means so much to them that they’d sacrifice travel, restaurant meals, and other luxuries to own one. That’s a decision only you can make.
The Bottom Line
The bottom line is that there's no clear-cut answer in your decision to buy a house or to continue renting but I believe that the tide is starting to turn towards home ownership. If you're one of those people who really values the idea of home ownership and the finances work out then it's probably a great time to buy. Home prices are low and sellers are offering up steep discounts to their asking prices to get a sale. There are also foreclosures on the market where even better deals can be had. However, with prices continuing to decline, be cautious about paying too much!
Buying vs. Renting Pro's and Cons
Buying a Home
- Pride of ownership
- Large transaction costs for buying and selling
- Build equity over the long term
- Higher on-going costs than renting
- Fairly stable monthly payment/no rent increases
- Housing prices may decline further
- Tax write-off for interest and property taxes
- Time consuming to maintain
- No on-going maintenance costs
- No home equity
- No time spent on house and yard chores
- At the whim of rent increases
- No pride of ownership
- Is It Better to Buy or Rent? - Interactive Graphic - NYTimes.com
Whether renting is better than buying depends on many factors, including how fast prices rise and how long you will stay in your home. Compare the costs of buying and renting equivalent homes.
- Rent vs. Buy - Financial Calculators from Dinkytown.net
Are you better off buying your home, or should you continue to rent? Mortgage Calculators and tools for your website!
- Buy or Rent : The Cardinal Housing Dilemma
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