Many individuals deliberate whether to continue renting or use their savings to purchase property, and this rent or buy decision can have important ramifications on a family’s long-term finances. The cost-effectiveness of purchasing a home largely depends on the current real estate market – but also incorporates outside financial factors stretching beyond 20 percent down payments and low-interest financing.
To determine where your money is best allocated, consider the following benefits of both renting and owning a home.
Financial Benefits of Renting
In today’s hot rental market, renting isn’t always financially savvy. Last year, the breakeven horizon, which is the number of years you would have to live in a home before the costs of renting exceed those of buying, was less than two years in half of the U.S. top 20 largest metros. It may seem as though everyone is better off renting, even if they can afford a 20 percent down payment, but that’s not always the case.
On the other hand, renters avoid overlooked home ownership costs, including necessary, sometimes spontaneous, maintenance expenses. Assuming you pay your 30-year fixed mortgage as scheduled and reside in your property for that period of time, you’ll be paying maintenance costs, somewhere between 2 and 5 percent of the purchase price annually, for three decades. Appliances, plumbing, electric, lawns, roofs and furnaces are all likely to require repairs, if not replacements, over the course of multi-decade home ownership. You’ll probably want to incorporate some aesthetic updates to interiors to increase the comfort of your home, too, adding to your overall budget.
In addition to maintenance and upgrades, renters also avoid paying taxes on their leased properties. Homeowners may assume they are out of the woods after paying off their mortgage, but they’re still required to pay city-mandated land fees. Property taxes sometimes cost as much as $1,000 per month, depending on your municipality.
Financial Benefits of Owning
The clearest benefit of home ownership is equity. When you pay off your mortgage on time and in full, you continuously build a financial stake in the property, increasing the percentage you can keep when it comes time to sell. Generally, regardless of the market, building equity in a property over five to seven years is likely to offset the costs of buying. If necessary, you can even borrow against your equity – with caution and ideally only after your mortgage is paid off. However, homeowners who borrow against their mortgages run the risk of foreclosure, often because they lose their stable income due to a job change or encounter an expensive medical issue that leads them to default.
In today’s market, mortgages are sometimes less expensive than monthly rent. For instance, the median home price in Dallas is $250,000. Savvy buyers in this price range put down at least $50,000 (20 percent of the home’s total cost) and can expect to pay around $1,234 per month, including principal, interest, taxes and insurance. This figure is calculated assuming a 3.671 percent interest rate and 30-year fixed rate financing, often offered to those with credit scores of 720 or higher. Alternatively, renters seeking apartments in Dallas can expect to pay around $1,325, which is the median rent price. Solely comparing the monthly expenses between owning a home and renting a home in Dallas proves owning is less expensive and more lucrative long-term.
While avoiding taxes is a benefit of renting, homeowners can alleviate some of these costs. Tax breaks exist for homeowners to deduct mortgage interest and property fees. In addition, an individual can keep the first $250,000 in profit at resale if he or she is the sole homeowner, and couples can keep the first $500,000. If you work from home, you might be able to write off your home office as a business expense. However, homeowners in escrow can’t deduct property taxes until the tax portion of their reserve is paid.
Homeowners might thrive on having complete control over their interior and exterior upgrades, especially since this can lead to increased home values and buyer interest. Major renovations are expensive, but a fresh coat of paint is relatively cheap at around $30 per gallon and can significantly enhance aesthetic appeal. If you own a home, try implementing minor but effective changes that increase resale value without breaking the bank.
Rent or Buy
Lessees and owners both face unanticipated costs – just in different forms. Landlords might decide to increase rent by 10 percent or more, forcing renters to relocate. Homeowners without fixed mortgages face fluctuating interest rates, and potentially significant increases in their payments due to shifting economic circumstances. Homeowners could also be forced to make costly repairs, such as a cracked foundation or remediating mold or termite issues. Life is unpredictable and many fail to budget for unforeseen circumstances. Being financially prepared with a six-month emergency fund is highly recommended for both renters and buyers. Ultimately, the decision to rent or buy comes down to a combination of running the numbers and recognizing your personal priorities.
Today’s guest post on figuring out whether to rent or buy was provided by Jennifer Riner of Zillow