Most young people start their adult lives off renting a home. This is often due to the high cost of purchasing a home. Not only do you have to save money for a down payment, but you also have to be able to afford the closing costs, not to mention the house maintenance costs. That being said, there are many advantages to buying a home, whether you are young or old.
Benefits of Buying a Home
There are many advantages of buying a home, whether it is big or small:
- Build up equity – Purchasing a home means you own it. Right off the bat, you only own the portion for which you put a down payment on, but eventually you build up equity. As you pay the principal portion of your mortgage down, you start to gain more ownership in your home.
- Reduce Your Tax Liability – There are many tax advantages of owning a home. You may be eligible for certain deductions on your taxes including the interest and points deduction. In addition, at least for this year, you can write off any Private Mortgage Insurance you pay.
- Make changes as you see fit – Typically, you don’t have to answer to anyone when you buy a home. You are free to change things inside and outside of the home. If you want to add on rooms or make major changes to the exterior, such as adding a patio, you may need the approval of your city or county, though.
- Make friends – When you purchase a home, you belong to a community. Typically, people who purchase homes stay in them longer than renters, which means building up stronger relationships in the long-run.
Benefits of Renting a Home
There are certain advantages of renting a home that some people find more pleasing:
- Qualifying is easier – When you rent a home, you still have to qualify for it. Usually the requirements are much less stringent with rent, though. As long as you have decent credit and the money to put down for a security deposit, you can obtain approval.
- Real estate market doesn’t matter – The values of homes increase and decrease with supply and demand. If you rent a home, you don’t have to worry about it. Whether the home increases or decreases in value, your rent remains the same for the length of your lease.
- Maintenance costs don’t apply – In most cases, you don’t have to worry about normal maintenance costs. If the plumbing stops working or your HVAC system breaks down, it is the landlord’s responsibility to fix it.
- Moving is simple – If you want to or have to move, it is usually much easier when you rent. You don’t have to worry about putting the house up for sale and finding the perfect buyer. You should wait until the end of your rental lease, but even this is not a requirement if you have to move quickly.
Disadvantages of Buying a Home
Just as there are advantages of buying a home, there are disadvantages as well:
- Upfront costs are high – Getting into the home when you purchase it can be costly. Not only do you have to put money down on the home, but you also have to pay closing costs. This could amount to almost 6% of the loan amount. You also need to pay to have utilities turned on and to furnish the home. It can cost $10,000 or more just in the closing costs and miscellaneous costs to buy a home, not to mention the down payment.
- Qualifying is harder – You have to qualify to purchase a home unless you will pay cash. This means you have to find a mortgage program that you qualify to receive. You need good credit, decent assets, a stable income, and minimal debts in most cases.
- Unexpected expenses – As a homeowner, you are responsible for all of the maintenance and repair costs. This might not matter when you first move in, but things can break and need repair or replacement, adding to the cost of owning a home.
- Dependent on the market – When you buy a home, you are reliant on the market. If housing prices dip, you could lose some of your equity. It is a risky investment that usually pays off in the long run, but you cannot predict how the industry will fare in the future.
Disadvantages of Renting
Renters have several disadvantages as well that you should be aware of:
- No return on your investment – The largest disadvantage of renting is the lack of a return on your investment. You pay rent every month, but do not gain any equity in the home or see any type of return. Instead, when you move, you hand over the keys and walk away with nothing.
- Higher tax liability – A person who rents a home does not receive any tax deductions, such as for interest or points paid. If the same person owned a home, he would have a lower tax liability because of the deductions given to homeowners.
- Higher rents – Your landlord has control over the amount of rent you pay. Once you sign a lease, your rent remains stable for the duration of the contract. However, once it is up, the landlord can increase your rent if he feels he should. This differs from someone with fixed rate mortgage who has predictable payments for the next 30 years.
- Approval for changes – You cannot make any changes you desire to a home you rent. The landlord must approve most changes that have a long-term effect on the home. This can limit your ability to make it feel like “home.”
Making the Choice – Buying vs Renting
Deciding between buying vs renting is a personal choice. If you don’t have the money saved for a down payment or closing costs, you may not have any choice but to rent. The good news is once you start renting, you can still save money purchase a home down the road. Not everyone is meant to own a home, but at least if you know the pros and cons of each side, you can make the decision that is right for you.