Buying vs. Renting a Home: Which is Right for Your Wallet and Lifestyle?

Focusing solely on the monthly mortgage payment versus monthly rent may be overlooking additional costs of ownership.

What tax savings can I expect with home ownership?
Traditionally, the costs of homeownership have been offset by tax savings generated by the mortgage interest deduction. Recent changes to the tax laws have lowered the cap on the amount of mortgage interest that can be deducted. Interest paid on home equity loans or lines of credit is still deductible provided that the money is used for improvement to the home. Before you make the decision to purchase, we recommend doing your homework on how current tax laws will affect you by reaching out to a certified tax professional.

Do house prices always go up?
The real estate collapse in 2007 showed us that home prices can suffer major declines. Before buying a home, consider how your finances would be affected if your home’s value increased slowly or not at all. Understand that buying a house with the intent of it serving as an investment can be risky. Do your research. Though houses do generally go up in value, they don’t always. It can help to think of your home as a place to live not just an investment.

Which option will have a greater impact on my overall wealth?
Make an accurate comparison between the financial impact of renting and buying by factoring in the complete costs of homeownership–not just mortgage versus rent payments–as well as how owning would affect your taxes. A rent vs. buy comparison can be done using the price-to-rent ratio, which is calculated by dividing the home value by the annual rent amount. If this number is less than 20, buying may be a better option for you. Conversely, if it is greater than 20, renting might be best. You can find online rent vs. buy calculators that let you plug in your own numbers to see the difference that buying or renting has on your long-term finances.

There are benefits and drawbacks to each option. Both are major financial and lifestyle decisions and there isn’t a right answer for everyone. Before signing a mortgage or lease, weigh the benefits and drawbacks of each choice.

BENEFITS OF OWNING A HOME
Security and freedom are two reasons to purchase a home of your own. When you are the mortgage holder, you have the right to make changes to the property. There are financial benefits to home ownership as well. Most homes can increase in value over time, which means that your investment appreciates.

In the first few years of making your mortgage payment, you’ll pay interest charges, which may be tax deductible. The longer you live in the home, the more principal you will be to pay off. As the balance of your loan declines, the equity in the home climbs. Owning a home also benefits your credit. Lenders perceive you as a good credit risk because your house can serve as security against future loans.

DRAWBACKS OF OWNING A HOME
Buying a house is one of the largest investments many people will make in their lifetime. Along with the cost of the home, you are also responsible for the monthly payment of principal, interest, taxes, and insurance (what is referred to as “PITI”). It takes quite a bit of pre-purchase cash before you even step foot in the door. Because of the upfront expenses and monthly outlay, homeownership is not for everyone.

BENEFITS OF RENTING
A sense of freedom is also associated with renting, but in a different sense. With a renting scenario, the only commitment you have is the security deposit, first and last month’s rent, and monthly rent. The landlord is responsible for most of the property’s upkeep, which greatly reduces expenses.

DRAWBACKS OF RENTING
An absence of equity is the primary problem with renting a property versus owning it. The money you pay each month builds the owner’s (aka “landlord”) net worth instead of yours. Most rental properties have rules you have to follow and the agreement you sign binds you to any restrictions, such as no pets or a specific number of people who are allowed to live in the home.

Attitudes have shifted in terms of homeownership and the best advice we can give you is to assess your financial circumstances and lifestyle needs to decide if renting or buying is for you.

Try out this rent vs. buy calendar to see what fits your budget best:  https://uhmfoundation.balancepro.org/resources/calculators/rent-vs-buy-calculator