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With the rise of interest rates over the last year, many buyers have changed their tune when it comes to buying a home. In perticular, prospective homeowners have hit the pause button on purchases and begun comparing the benefits of renting versus buying instead of jumping into the housing market by preparing to outbid the competition for their dream home.
To be honest, most first-time homebuyers have regularly felt trepidation as they consider the big jump from renting to owning. These days you hear people arguing that renting a home might make more financial sense than buying one. Well that stems from the fact that for many individuals, renting has typically been their only reality, despite that they still dream about homeownership and are equally committed to a sound financial decision.
However, exactly how accurate is that perception? The reality is that people who say that renting is the better option do not always take into account all of the factors. So in taking a closer look at what you need to consider in deciding the question of renting vs. buying we can determine where the real value lies in 2022.
Initial costs
No one can argue that the initial costs of buying a home outweigh those of renting. That said, when you put down a 10- 20% down payment you are not just securing a place to live for the next year, you are actually entering into a legally binding agreement to buy a property that will become your home. The actual act of purchasing a home catapults you into a deeper connection with your community. You will not have the sam esense of ownership and belonging if you rent although it is cheaper. However, renting is undoubtedly the cheaper option for those focused on upfront expenses.
How many years are you planning to stay
A large factor in determining whether it is better to rent or buy is the number of years you plan to stay in the same location. It is important to keep in mind that the value of owning a home is more evident over a long time. The equity on a home is builds up over time and the upfront fees and closing costs are spread out over time. The facts are that historically, most homeowners will receive more financial advantages buying a home than renting one.
Taxes and tax deductions*
The fact is that homeowners pay yearly real estate taxes. In fact, the more expensive the home, the more taxes you owe to state and federal taxes. While renters, on the other hand, are exempt from these property taxes.
However, the silver lining for homeowners is you can deduct a large portion of the interest on your mortgage. Indeed, homeowners are allowed to deduct home mortgage interest on the first $750,000 ($1M if the mortgage was secured prior to December 14, 2017). This can be a huge incentive for people to buy versus rent.
Equity
Equity is really what homeownership is really all about and the reason for buying a home. When you rent a house or an apartment, you are not building any equity. In fact, you are paying and building equity for your landlord. That’s why buying a home enables you to build wealth and is considered to be such a great investment over time.
Although not really a guarantee, building equity is fairly straightforward. You are required to consistently make payments that reduce the principal amount owed plus the interest on the loan. In order to create wealth, your home needs to appreciate in value over time. In some rare instances or market conditions your home can depreciate in value, in this case, the equity may be negative or you may have to hold the property for a longer period of time.
The majority of homeowners make their monthly mortgage payments and will build equity over time. That is the core of the American dream of homeownership and renting can never compete with that.
Maintenance and Costs
Both homeowners and renters are on the hook for certain fees. Since homeowners have a more lucrative stake in the property they live in and they also have a larger burden when it comes to maintenance and fees.
For example, a typical homeowner of a home purchased needs to spend yearly home maintenance and homeowner’s insurance, owner-paid utilities and other miscellaneous fees and the costs start to mount.
Renters might have to pay renter’s insurance, an initial broker’s fee and a security deposit. These sums of money do not get invested but rather are gone. Although it is less than a buyer would pay, renters will receive less in return: no return on their money, no freedom to decorate, no freedom to renovate and zero opportunity to build intergenerational wealth.
Monthly Rent vs. Monthly Mortgage In this example, you bought a home for $250,000, with a 20% down payment and have a 30-year mortgage. Depending on the interest rate you were able to lock in at the time of purchase—for our purposes let’s say it’s 5.00%—you may have a monthly mortgage payment for as little as $1,073 (not including taxes and fees).
This is a predictable number for 30 years. You will always pay the same amount every month as long as you have a fixed rate; the only thing that changes is the amount of principal vs. the amount of interest and the possibility that taxes may go up during the lifetime of the loan. If you take a look at the amortization schedule, you can follow along the monthly breakdown over time between principal and interest.
When you are renter, you cannot predict past the term of the lease, usually 1 year. Not only can you not guess how much your rent could skyrocket, but you cannot control it either. This usually puts renters in an uncertain state with reference to their finances. When it comes to finances, predictability matters.
Useful tools to help you make your decision
It is important to do your homework and compare your options when it comes to buying versus renting. The immediate gratification of a nice rental may not be as important to you in your particular time in life than a single family fixer upper and delayed gratification for a better neighborhood, schools or investment.
While this quick comparison may have been helpful to those of you weighing the pros and cons of renting vs. buying, this is far from the only information source to help guide you in your journey.
Our affiliate lender at Coldwell Banker, Guaranteed Rate, offers a great Rent or Buy Calculator as well as a host of other tools including a state-of-the-art mortgage calculator, that is fully customizable. We’ve looked at six areas in general terms, and buying a home came out as the preferred approach in four of them, but these tools can help you figure out the specific benefits for your unique situation.
Your best tool is your professional licensed Realtor and real estate Attorney, who can make your homebuying journey more productive and can provide peace of mind during the process.
Disclaimers:
Maria Fernandez Gomez and Coldwell Banker Realty does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation. Sample rates are provided for illustration purposes only and is not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard.
Image credit: Unsplash
