Renting vs Buying A Home

What's the Right Decision?

This may post contain affiliate links. As an Amazon Associate I earn from qualifying purchases.

Written By:

Rickey Shorter, CSM, CSPO, MLO, SFR, CAM

Reading Time: 11 minutes

Are you ready to take the plunge and become a homeowner?

Whether you’ve been dreaming of homeownership for years or are just starting to consider it, now is the perfect time to investigate your options — especially if you’re unsure whether renting or buying is better for your current circumstances. Whether you decide to rent or buy will depend on several factors like your financial situation, job stability, and upfront costs.

But don’t worry – I’ll help break down important considerations so you feel confident in making the best choice for your life now. Let’s take a deeper dive into whether it is better to rent or buy a home right now!

Homeownership

Advantages of Homeownership

The American Dream begins with homeownership. Being a homeowner can be an investment in both your financial and emotional future. In addition to building equity through monthly payments, you also get to customize and improve your home as you see fit. Plus, you’ll enjoy the peace of mind that comes with knowing that you are investing in yourself rather than in someone else’s property.

Let’s dig deeper into this topic.

Home Equity

One of the biggest advantages of buying your dream home is that you are investing in an asset. When you purchase a home, the home value can appreciate over time, giving you even more equity to work with if you decide to sell or borrow against it in the future.According to Investopedia, home equity is the amount of value remaining in the home when the home’s debt (mortgage, liens, etc) is subtracted.According to data from the Housing and Urban Development department (HUD) supplied by Federal Reserve Data (FRED), in Q3 2012 the average price of a home was $248,800. In Q3 2022, the average price of a home rose to $454,900. This means that if you purchased a home in 2012 for $248,800 and the price of the home rose to $454,900 in 2022, you had the opportunity to build equity of $206,100.

Additional Income

When you own a home, you can take advantage of several income-generating options.

Many owners have found that short-term rentals such as Airbnb can be a great way to generate additional income. In fact, in some cases, short-term rentals have provided homeowners with the ability to make more money than the mortgage payments themselves!

Other owners prefer to rent out part of their homes on a long-term basis. This can be a great way to generate a steady stream of income while also creating the potential for capital gains. Plus, you’ll have a lot more control over who inhabits your home.

If you are looking for more privacy another option is a multi-family home purchase, you can capitalize on additional income by renting out units without someone living in your space. Here’s a tidbit of information. Did you know that an FHA loan will fund a home purchase of up to 4 units? This is great news for those looking to invest in a home and earn extra revenue.

Generational Wealth Building

Homeownership is a great way to create generational wealth for your family. When you purchase a home, it can become an asset that can be passed down from one generation to the next. This means that not only will your family have a place to live, but they may also benefit financially from their inherited home.With national home value appreciation between 3.5-3.8% per year. It is easy to see how homeownership pays off in the long run.

Tax Deductions

In addition to the potential of increased equity, there are several tax benefits available to homeowners. Mortgage interest, property taxes, and points paid at closing are generally deductible on your federal income tax return. It’s important to talk with a tax professional to understand which deductions you may be eligible for.

Pride of Ownership

Last, but not least, owning a home can provide a sense of pride and accomplishment. Many people view having your own home as an achievement and it can be rewarding to have a space that you can turn into a unique reflection of your style not to mention being your own landlord has its benefits.

Homeownership Disadvantages

Buying a home can have significant upfront cost downpayment and closing costs due at the time of purchase. These costs can range from 3 to 6 percent of the purchase price and should be taken into consideration when researching your budget for homeownership.

Maintenance Costs & Repairs

Owning a home means that you are responsible for all its maintenance costs and repairs, especially true for older homes! This might include repainting, replacing the roof or gutters, HVAC repairs, and more.

Therefore, it is important to factor in these additional costs and a plan for reserves when considering homeownership.

Lack of Flexibility

When you own a home, you’re tied to the location until you sell it. This can make moves difficult if your job requires you to relocate frequently or if you need to downsize or upsize your living space. You’ll likely have to go through the process of selling your home to take advantage of a location change.

Long-Term Financial Commitment

Owning a house comes with monthly payments and homeowner’s insurance, which can be difficult to manage if you have other financial priorities or responsibilities. A long-term financial commitment may not be ideal for homeowners who plan on relocating in the near future.

Home-buying Process

The home-buying process can be overwhelming and complicated. It involves paperwork, research into the local market, financial considerations, and more. This process can take months to complete and can be filled with surprises. Make sure to select a local Realtor® to help with the process.

Renting

Renting Advantages

Renting can be a more cost-effective and flexible option for those who aren’t looking to stay in one location long-term.

It’s also easier to manage financially since you won’t have additional costs like home maintenance, repairs, or taxes associated with homeownership.

Renting Disadvantages

Renting may seem like an easy solution to homeownership, but there are drawbacks.

Monthly Rent

One of the significant drawbacks to renting is that tenants must pay a monthly fee for their housing. As opposed to owning, renters don’t receive any equity or see an end date for paying rent – they are continually shelling out money with no return on investment.

In contrast, when taking out a mortgage there’s an initial and final payment date plus every installment adds towards building your net worth by increasing your home’s equity position. Renting can go forever without ever adding anything back into your pocketbook!

Rent Increases

Renters risk experiencing rent increases, since your landlord may adjust the rent rate during renewals. This can be a significant financial expense if market prices increase or if you’re already on a tight budget.

Be sure to read and understand your rental agreement before signing it so you are prepared for any potential rent increases down the road.

Lack of Privacy

Renting can often mean less freedom and privacy as your landlord may need to enter the rental unit for maintenance or repairs with little notice, especially if you don’t have a lease that specifies the conditions the landlord may enter the premises.

You also won’t be able to make significant modifications to the rental property. This can limit your ability to customize and personalize your living space.

Mortgage Vs. Rent Payments

Have you ever considered what those rent payments could do if they were dedicated to buying a home? You might be surprised by how much more of a house you’ll get!

Renting a place each month can get expensive. It may even start to feel like you’re paying for a mortgage! Use our Mortgage Calculator and see how much home your monthly rent can purchase.

Neutral Ground

Let’s look at mortgages. Mortgages can be likened to that unwanted fur your beloved pet leaves behind on the couch – nobody likes it but unfortunately, it’s an unavoidable reality for most of us.

To get a better understanding of what is included and excluded in a mortgage payment, let’s break it down.

What is included in Mortgage Payments?

Purchasing a home comes with an array of financial obligations. Mortgage payments are made up of not just the loan balance, but also interest, taxes, and insurance premiums. Additionally, homeowners must consider future repairs or projects that require funds to maintain their property’s value over time.

Let’s explore each one of these elements in greater detail.

Private Mortgage Insurance (PMI) vs Mortgage Insurance (MI)

Private mortgage insurance (PMI) is a form of protection for the lender in case you default on your mortgage payments. Generally, this type of insurance will be required when there is less than 20% equity in the home. PMI can be cancelled when the principle balance is paid to less than 80% of the original value of the home.The FHA form of PMI is mortgage insurance (MI). MI can not be removed for the life of the loan.Speak to your lender about if PMI or MI is required for your loan and the required percentage.

All about Property Taxes

Property taxes are based on the home’s value and the local tax rate. Generally, the higher your property’s value, the more you pay in property taxes. Your property taxes fund local schools, fire departments, police, and other services in your community.

Homeowners Insurance

Most lenders require you to have a home insurance policy to protect the property.

Home insurance typically covers damage caused by fires or other disasters such as tornadoes and hurricanes. It will also cover any losses arising from theft or vandalism. Speak with an insurance professional to determine what type of coverage is best for you.

Mortgage Payment - Principle and Interest

The two components of your mortgage payment are the principle and mortgage interest. The principal is the amount you borrowed to purchase the home, while the interest is what is charged for borrowing that money. Each month, some of your payment goes towards paying down the principal, while most of it goes to pay off the interest.

Lastly, homeowners should be aware that their mortgage payments are just one part of the total cost of homeownership. You must also budget for maintenance and repairs, property taxes, and insurance premiums, which can add up over time.

By understanding all the costs involved in owning a home, you can make sure you’re prepared for the future and have the sweet home of your dreams.

Renting Vs Buying A Home? Which is Better?

Ultimately, both renting and owning have their benefits and drawbacks, so it is essential to assess each option cautiously before making a decision.

If you decided that being a homeowner is best for you, having a plan in place to manage unforeseen costs can help you stay on top of the maintenance and repairs. Doing regular checks around the home will save you time, money, and stress in the long run!

If renting is best for you, thoroughly read and understand your rental agreement before signing so you know what to expect in terms of rent increases, privacy, and ownership. Make sure to research local amenities nearby the rental property to make sure it is a good fit for you.

Whether you choose to rent or buy, it’s important to understand the financial implications of both options before making a decision. Both can be great options depending on what is best for your current situation and lifestyle.

Good luck!

Kid Breukelen Realty Group is Here to Help

Ready to turn your real estate goals into reality? Reach out to Kid Breukelen Realty Group to explore tailored real estate solutions and benefit from our all-in-one support for buying, selling, property management, and mortgage services through Loan Factory, LLC. Let’s make your journey a success!