There is both an upside and downside to buying or renting a home, condo or apartment. Buyers can argue that owning property gives them financial security that they can pass on to their children. However, that American Dream can be very expensive and financially limiting. On the other hand, renters have greater flexibility because it is easier for renters to walk away from a dwelling and move when necessary, although the money they pay in rent goes towards the property owner’s financial security, not theirs.
Becoming a homeowner is a big responsibility and commitment of time and resources. Whether or not you should buy or rent a home depends on your financial stability and several other factors. First, are you financially able to buy a home? Is your income and credit good enough to be approved for a mortgage? Check your credit report and see if there are any issues you need to take care of before applying for a mortgage. The better your credit score, the better interest rate and mortgage terms you will qualify for, which can save you thousands of dollars over the life of the loan. If your credit needs some work, it might be a good idea to consider renting until you have improved your credit rating and saved up for a considerable down payment.
If you are debating on buying your first home or renting, here are some pros and cons to help you weigh your decision:
Reasons to Rent Instead of Purchasing a Home
- You have fewer responsibilities for repairs and maintenance of the property
- There are typically fewer upfront costs and additional fees
- There is no long-term commitment to staying
- Late rental payments are not likely to affect your credit the way a late mortgage payment will affect your score
- If the real estate market takes a downturn, you won’t lose money invested
- You will have down payment and maintenance funds available for other investments
If you don’t have extra money in the bank, renting is the way to go. If you do have money, but choose to rent, you will have other options for investments. There is no demand for a large investment with a rental.
As a renter or lessee, you have fewer responsibilities and less of a time commitment. You can rent month to month, or to a short-term lease – allowing you to walk away virtually at any time. And you can expect your landlord or property owner to handle maintenance repairs. Generally, a renter will not have a lot of expenses other than the monthly payment and a security deposit upfront. And if you need to, you may even find a rental that includes furniture. When you own your own home, you are responsible for the cost and completion of every necessary repair or maintenance task. Lawn and pool care cost something each month, even if it is only your time.
If you decide to buy a home, you will have to put money down and pay for closing costs. If you didn’t invest this money in your home, you could earn a rate of return with another investment. And if the real estate market goes down, you could lose your down payment or even the value of your property. Selling your property might become impossible, without putting more money in to pay back the bank.
If you are late with your mortgage payment, even one month, it will damage your credit score. If you are late often, you can lose your home. If you default and the bank forecloses, your credit score will take a long time to recover. Conversely, when you are late on a rent payment it is rarely reported.
The only time it can really affect your score is if you are evicted or if you refuse payment (which shows up as a collection), and can directly affect your ability to get a mortgage in the future since mortgage lenders see your ability to handle rent payments as a good prediction on how you will handle mortgage payments.
If you’re unsure how long you will be living in the area, it is best to rent and not incur the costs associated with homeownership.
Reasons for Buying Your Own Home Instead of Renting
- You can pass on ownership of the property investment to your spouse or children
- You repair or modify your home as you see fit (in accordance with municipal codes)
- You can potentially turn a profit on your investment if the real estate market is strong
- You can take advantage of IRS tax benefits for homeowners
- You can leverage your property to apply for other loans or credits
Everyone want to experience the pride of participating in the American Dream by owning their own home. You can potentially increase your wealth – if the market is strong – and pass on that wealth to your beneficiaries. When you own a home you tend to have the freedom to do what you wish on your own property – in accordance with laws. And though you will be responsible for maintaining the property, you can reap a number of benefits from expanded credit to tax breaks.
If the real estate market is strong over the life of your loan, your investment can be remarkably profitable. Every single dollar that you pay in mortgage interest for your primary residence is tax deductible, which can save you a lot of money in the long run. And as you continue to build equity, you can leverage this profit to use in other investments, to improve the home’s value, help a child pay for college or on any number of purchases.
When you rent an apartment, you are borrowing someone else’s home. Any improvements will increase the value for the homeowner and you will not reap any benefits from the investment of your monthly rent payments. While owning your own home is wrought with responsibility, the money you invest in the down payments, mortgage payments and taxes are not lost from your total value.
If you have the money or credit and plan on staying in one place for a number of years, it is probably best to consider homeownership and skip the financial drain of renting.
Making a Decision to Fit Your Situation
Finances aside, the decision on whether or not to rent or buy a home typically ends up being a personal one. If you are financially stable, confident in your employment status, location and are ready for the responsibility of homeownership, then buying a home may be the right decision. If you’re not planning on staying in the area and not interested in using extra funds to maintain a home, then renting is probably a better option.
Whichever housing situation you choose, it’s best to be financially prepared. If you are interested in buying a home, work on your credit score and save for your down payment so that you can qualify for the best interest rate possible. And if you are content to rent, set a budget which is padded to handle any rent hikes, insurance deductibles or expenses for moving.