The benefits of renting
The rent-versus-buy decision isn’t a clear-cut decision. There are many variables that extend beyond the financial aspects of the decision. Homeownership is the clear goal for many, but renting has benefits as well, including:
- No ongoing maintenance costs. Research shows that homeowners spend about 1% to 4% of the home’s value annually for maintenance. For example, if the cost of your home is $200,000, expect to spend around $2,000 to $8,000 on home repairs each year. Renters don’t need to worry about these expenses.
- Access to extra amenities without paying HOA fees. If you live in a condo or a planned community, you may have access to special amenities, such as pools and recreation areas. Homeowners pay homeowner association fees for these extras, but when you are a renter, these are typically covered by your rent.
- No need to pay real estate taxes. Property taxes add extra expense to a monthly mortgage payment. For example, a property tax bill that is $3,500 annually adds up to around $292 each month.
- No need to hand over a large sum of money. Most homeowners pay a down payment of at least 3%. Renting doesn’t require you to tie up a large sum of money in a housing investment.
- Greater flexibility. Renters have the ability to move as often as they wish. They don’t need to worry about selling a house or, in the case of a market decline, getting stuck underwater on a mortgage.
- Ability to downsize more easily. Renters who want to decrease living expenses can do so easily by selecting a less-expensive housing arrangement. Homeowners must go through a more involved process, which includes putting their home on the market, waiting for the right buyer and then finding a new home to purchase.
- Reduced insurance cost. The cost of homeowners insurance is around .5% to 1.5% of a mortgage amount annually. So, for a $250,000 mortgage, insurance costs around $100 to $315 monthly. The average cost of renters insurance is about $15 per month.
- Lower utility expenses. Landlords may pay some utility expenses, such as for water, sewer or garbage. If you live in a condo, sometimes certain expenses are covered by the HOA fees. Landlords may also pay for landscaping services, which saves you money and time.
- No “do it yourself” project demands. Many homeowners spend financial resources and a large amount of time on home improvement projects. As a renter, you don’t need to worry about ways to upgrade or reinvent your space.
The benefits of purchasing a home
If you’ve always dreamed about purchasing a home, there are many financial benefits. Additionally, there are first-time homebuyer programs that help with the upfront cost, such as assistance with down payment and closing costs. Here are a few benefits of homeownership.
Ability to build equity in the home. Homeowners are actively building equity in an asset, and payments are working toward that equity. For example, home prices in the U.S. rose from an average of $240,400 in 2014 to $382,700 in 2019, which is a 10% increase.
Potential tax deductions. Homeowners may be able to deduct mortgage interest and property taxes annually. This can assist with reducing the overall cost of ownership through tax savings.
Predictable monthly housing expenses. Rents increase on average about 3% to 5% annually, depending on geographic location. Monthly rent increases add up over time compared to a mortgage, which stays the same each month, assuming you have a fixed mortgage rate.
Forced savings. A mortgage allows you to proactively “save” your money each month when you put it toward paying off your home loan. At the end of the loan term, you’ll have a fully owned asset and in most cases equity that create financial security.
Ability to move up in the future. Being in the real estate market enables you to earn home equity and, when you’re ready, “move up.” Research shows that a first-time homeowner’s average down payment is 3% compared to 22% of that of prior homebuyers. People who own homes usually can leverage that asset to make a larger down payment on their next house.
A credit history resulting from having a mortgage. Debt payment history makes up the largest part (35%) of your credit score. Financial institutions use your credit score to determine loan approval and your interest rate. As you reduce your mortgage loan balance, your credit score will rise.
The ability to put down roots. A non financial benefit of homeownership is the ability to put down roots in your favorite neighborhood. This is important if you have a school district preference or prefer to have more control over your commute to work.
The flexibility to customize your space. Renting limits your ability to customize your space. Owning gives you the complete freedom to paint walls any color you like, start home renovations and create a space that fits your unique needs.
Weighing personal factors in the decision
Long-term goals and personal preferences play heavily in your rent-versus-buy decision. Buying doesn’t always make sense, and renting isn’t always “throwing money down the drain.” The generalization that “if your monthly mortgage payment is the same or less than your rent, you automatically should buy” also isn’t true.
Fast-moving housing market changes and personal factors that affect your need for flexibility are critical when it comes to your making the right decision for yourself. A rent-versus-buy calculator can help you quickly determine the best financial decision. Then you can weigh this figure against your personal needs and risk threshold. For example, if the housing market is uncertain or prices are high, you might decide to hold off until your path is clearer.
