A home is one of the most expensive purchases most of us will ever make during our lifetime. Whether you decide to rent or buy, either choice comes with its own rewards and risks. Homeownership offers many advantages over renting including:
Advantages of Buying versus Renting
|Tax write-off||No tax write-off|
|You can upgrade your home as you see fit||Need permission to make any changes|
|Build equity in your home as value appreciates||Your money goes toward the landlords equity|
|Control of loan payment options||Rent can increase periodically|
|Pride of homeownership||You have no ownership|
While owning your own home has many benefits, there are still risks to consider:
Disadvantages of Buying versus Renting
|You're responsible for property maintenance||Your landlord or manager handles general repairs|
|Need to sell, rent or lease property in order to re-locate. May have to wait until market conditions are right||Freedom to move once your lease expires|
|You pay for all your own utilities, property taxes and insurance||May include utilities, property taxes, and property insurance|
|Home improvement upgrades can run into thousands of dollars||You're not financially responsible for improvements|
When does it make sense to buy?
People, who have generally rented their whole lives, purchase a home for various reasons. Owning something of value with a chance of watching their investment appreciate is one reason. Purchasing a home to save money over the long-term is another.
Let's say you're currently renting a two-bedroom, two-bath apartment. Your monthly rent is $1,000. You find a two-bedroom, two-bath at a market price of $250,000 (roughly the national average.) You have $25,000 saved - enough for a 10 percent down payment. For the purpose of this example, you're looking to finance $225,000, which includes closing costs.
Using one of several mortgage calculators on the Internet, your monthly payment would be approximately $1,385 for a 30-year fixed loan at an APR of 6.20% (the national average is currently 4.50%). After taxes and appreciation in equity, your monthly payment over five years would average $499 per month.
Costs Savings of Buying versus Renting
|Monthly rent/estimated mortgage payment||$1,000||$1,385|
|Purchase price of home||$250,000|
|Percentage of down payment||25,000|
|Length of loan term (years)||30|
|Years you plan to stay in the home||5|
|Yearly property tax rate||1%|
|Yearly home value appreciation rate||4%|
|Price of home after appreciation||$304,163|
|Remaining balance after 5 years||209,887|
|Equity in house||94,276|
|Tax savings (28% bracket)||23,030|
|Avg. monthly payment over time||1,047||499|
|Total payments (over 5 years)||$62,820||$29,973|
|Total savings if buying||$32,847|
|Source: Ginniemae.gov. These calculations are estimates only. You should always seek the guidance of financial or tax experts before making any buying decisions.|
The outcome could dramatically change should an unforeseen economic downturn or financial hardship occur (e.g., home improvement costs, catastrophic damage, etc.). While, no one can predict if home appreciation values will spiral downward, or if mortgage interest rates will rise, it's clear that under the right circumstances home ownership can be financially rewarding.