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Buying A Home Vs.
Renting A Home: Which Is Better?
By
MySpendingPlan.com Editorial Staff
Housing is a
basic need for every person. When it comes time to have your own home,
you will be faced with the choice of either owning your own home, or
living in a rental home or apartment. While most people believe that
being a homeowner is far better than being a renter, that is not always
the case. So should you pursue houses for rent or houses for sale?
In order to
determine whether it would make more financial sense to own a home than
to rent it (or vice versa), you need to take into account the following
things:
Cost of Home
Ownership and Cost of Renting:
The cost of home
ownership includes these expenses:
- Down payment (or full
purchase price)
- Monthly mortgage
payments
- Closing costs
- Interest on closing
costs
- Broker’s commissions
- Property taxes
- Maintenance expenses
(utilities, repair)
- Home owners insurance
As opposed to
this, the cost of renting a home involves these expenses:
- Security
deposit
- Monthly
rent
Once you have
listed down the figures for all these expenses, you have to calculate
your total cash outflow each month. Keep in mind that home owners also
get tax breaks and deductions on their mortgage interest, neither of
which are available to renters. So, factor in these tax breaks when
calculating your total cash cost.
Once you do
that, you have to factor in the inflation rate, the annual increases in
your monthly rent (while mortgage payments can remain the same for the
entire term of the mortgage, depending on what type you choose, rent
increases every year), and the rate at which your home is likely to
appreciate in value.
After doing all
these calculations, you can determine whether it will be better to rent
a home or buy a home. Typically, if your monthly rent costs and monthly
home owner costs are about the same, you should buy a home. If the cost
of owning a home is a little more than renting it (10% to 15% more), you
should still buy a home. This is because your monthly mortgage payments
will eventually stop, but your rent never will. Also, being timely with
mortgage payments can really help your credit score. Finally, there is
a lot of pride and reward in owning your own home that is harder to
measure in dollars.
However, if your
home owning costs are much more than renting a home, it may be better to
rent a home and invest the money that you save in other places where you
are likely to get better value for your dollar.
Advantages of
Home Ownership and Advantages of Renting
As a general
rule, here are some situations in which houses for sale are a better
option:
- If you will
be living in the home for a long time such that you will pay off the
mortgage and continue to live in the home for “free.”
- If you know
that the home will appreciate in value more than the inflation rate,
it is usually better to buy.
- If you
desire the security of being a homeowner.
On the other
hand, houses for rent are the better choice in these situations:
- If you are
likely to move frequently then renting is much better as every time
you move, you will not have to have the risk of selling your home,
paying closing costs and new home buying costs.
- If the
value appreciation rates of homes in the area you intend to stay are
not higher than the inflation rate, it is better to rent a home.
The money that you save by not buying a home can be invested for
more lucrative returns in other investment vehicles.
- If you seek
to live in a super inflated real estate market where it would cost
you significantly more per month to buy a place than rent a very
similar one, then renting may be the best bet.
There are online
calculators that can help you to determine which the better option is -
home buying or home renting. So with the advice mentioned here, and
help from home buying vs. home renting calculators, you will be able to
make the right choice.
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