For many people, homeownership is synonymous with the American dream. After all, what could be more idyllic than a picket white fence and a two-story home with a spacious backyard?
But between today’s record-high mortgage rates and elevated home prices, you’re probably wondering if it’s better to drop $50k on a down payment or to continue renting your apartment. There’s no one-size-fits-all answer to this question – it depends on your unique circumstances.
Let’s explore the pros and cons of both options so you can make the most informed decision.
Benefits of owning a home
Are you thinking about making the jump from renting to owning? Here are some reasons why it could be a great idea.
In simple terms, equity is the difference between how much your home is worth and how much mortgage you owe. Every time you pay your mortgage, you’re building equity in your home.
Your equity can also increase if your property appreciates, giving you a nice nest egg to tap into when you retire. And if you ever need cash to renovate your home or buy a second property, you can borrow against your equity by taking out home equity loans or HELOCs.
Federal tax benefits
Apart from having a roof over your head, being a homeowner also comes with some terrific tax benefits. For example, you can deduct your home mortgage interest on the first $750,000 of your mortgage debt.
If you’ve lived in the home for at least two years out of the five years before selling it, the home sale exclusion law allows you to exclude the first $250,000 of profit from your income.
Improving your credit score
Your payment history accounts for 35% of your credit score. Your FICO score might increase when you make your mortgage payments on time each month. And as your positive payment history becomes more extensive, potential lenders will see that you’re a responsible borrower and be more willing to offer you favorable terms in the future.
If you’re ready to finance your home purchase, learn about the different types of mortgage loans to decide what option would make the most sense for your situation.
Control over living space
Being the owner of your home means you have control over it. Want to paint your living room pink? Go for it! Want to knock out a wall to create a more open floor plan? Have at it!
Of course, there may be some exterior decoration limitations depending on your HOA (homeowner’s association). But for the most part, you have freedom when personalizing your home’s interior space.
Another major perk of buying a home is the stability it provides. If you opt for a fixed-rate mortgage, you’ll know exactly how much your housing payments are for the next 15 or 30 years.
You also won’t have to worry about your landlord increasing the rent or selling the property. And when you have a permanent place to call home, it’s easier to feel like you belong to a community.
Cons of owning a home
Owning your own property is not always rainbows and butterflies — it also comes with some downsides. Before purchasing your dream home, here are a few things to keep in mind.
Paying for upkeep and repairs
From leaky roofs and broken appliances to clogged toilets and jammed garbage disposals, unexpected repairs can quickly eat up your savings if you own a home.
According to Angi, the average homeowner spends about $3,018 a year on repairs and upkeep. That’s not counting major renovations or additions, which can easily cost thousands of dollars. So, if you’re not handy or don’t have a lot of money saved up, owning a home can be a financial burden.
High upfront costs
There’s more to consider when buying a house than just the sale price. In addition to a down payment (anywhere from 3-20% of the loan amount), you’ll also have to pay closing costs (typically 2-5% of the loan amount) and moving costs. And if you’re buying an older property, you might have to shell out a few thousand dollars to furnish it and fix it up.
So how can you prepare for all of these expenses? Start by budgeting! Calculate how much you need to save to buy a house by factoring in the down payment amount, closing costs, and other related expenses.
Another not-so-fun part of owning a house is paying property taxes. Depending on where you live, these taxes can be pretty hefty. For example, in New Jersey, the property tax is 2.49%, which translates to $5,419 annually on a $217,500 home. So, while owning a house may be the American dream, be sure to factor in the cost of property taxes before you take the plunge.
If you own a home, you’re less likely to pick up and move to a new city or town on a whim. And if you do decide to move, you’ll have to put your home on the market. Selling a house takes time, effort, and money — and there’s no guarantee you’ll find a buyer willing to pay your asking price.
So, if you value mobility and flexibility, you might want to think twice before signing the dotted line on that mortgage agreement.
Takes time to build equity
When you begin paying your mortgage, your payments will mostly go toward interest rather than the loan’s principal. This can make it feel like you’re stuck in quicksand, never making progress.
Building equity in your home requires plenty of patience. But as you continue to make payments, more and more of your money will go toward the principal.
Advantages and disadvantages of renting
Like buying a home, there are also pros and cons to renting.
- No need to worry about property taxes
- The freedom to move if your job or lifestyle changes
- Ability to try out a new city or neighborhood before making a long-term commitment
- Your landlord is responsible for maintenance and repair costs
- Rent payments are typically lower than mortgage payments
- Fewer unexpected expenses
- The landlord can sell the property or raise the rent
- You can’t make changes or renovations without the landlord’s consent
- You aren’t building equity by paying rent
- Some landlords don’t allow pets
- Less stability compared to owning a home
- You can lose your security deposit if you damage the property
For the most part, renting is a flexible and relatively affordable option for housing. Though you’re at the mercy of your landlord when it comes to rent prices and policy changes, you have the freedom to move around as you please and don’t have to budget for maintenance expenses.
If you’ve decided that renting is the right option for you, be sure to take your time and shop around for the best rental before signing your lease agreement.
Renting vs. buying a house
There are pros and cons to both renting and buying, and it ultimately comes down to what makes the most sense for your situation. Buying a house allows you to build equity, improve your credit score, take advantage of tax benefits, and create a sense of stability and security.
On the other hand, renting allows you to move when you want, without the hassle (and expense) of selling a house. Plus, you won’t have to come up with a large down payment or worry about closing costs and property taxes.
To rent or buy: how to make your decision
Still on the fence about whether to buy or rent? Here are a few key things to consider.
The responsibility of maintaining a property
Are you financially and mentally ready to be responsible for maintaining your property? If the answer is no, it might be best to stick with renting. But if you’re up for the challenge of mowing the lawn and fixing leaky faucets, then homeownership could be the right move.
Your financial situation
Can you comfortably make monthly mortgage payments without putting yourself at risk of foreclosure? If not, you might want to hold off on buying a home until you’re in a better position financially.
Do you see yourself living in one place for years or prefer the freedom to pick up and move at a moment’s notice? If you think you might want to live in a different city or state in the next few years, renting may be the better option since it’s easier to break a lease than sell a house.
Is renting a waste of money?
You hear it all the time — “Why are you still renting? You’re wasting your money!” or “You could’ve bought a house with how much you’ve paid in rent!” And while, in some cases, it does make more financial sense to buy a property rather than rent one, that doesn’t mean renting is automatically a waste of money.
Plus, there are many benefits to renting a place, like the flexibility to move out when your lease is up or not having to worry about maintenance and repairs. So if you can’t afford to put down a large down payment right now, don’t stress about it — there’s nothing wrong with renting a place as long as the rent is within your budget.
Is it cheaper to rent or buy?
In some areas like Silicon Valley, rents are sky-high, and prices for even the smallest apartments are out of reach for most of us. In some rural parts of the country, housing costs have stabilized or even dropped in recent years, making buying a more affordable option.
So what’s the verdict? Is it cheaper to buy or rent? Realtor.com’s June 2022 Rental Report shows that renting is more favorable than buying in more than 75% of the fifty largest cities in the United States. Even though the U.S. median rental has hit a new record high of $1,876 in June, the monthly starter homeownership costs are even higher, coming in at $2,437.
How much should I budget for home maintenance?
You should budget 1% to 2% of your home’s purchase price each year. So, if you paid $250,000 for your house, you’d want to have $2,500 to $5,000 set aside for repairs.
Of course, this number can change depending on many factors, such as your home’s size, age, and condition. But this is a good rule of thumb to start with. So start stashing away those pennies to keep your home in tip-top shape.
Do what makes sense for you!
Buying a house has its perks. You can build equity, make memories, and create a sense of belonging. But it’s not suitable for everyone.
Ultimately, the best way to decide whether to buy or rent is to carefully weigh all the pros and cons. Ask yourself questions such as: Do I want the flexibility to move whenever I want or the stability of staying put? Can I afford the cost of maintaining a house? Will I overextend myself with a large down payment?
Whatever you decide, just make sure it makes YOU happy and makes the most financial sense for your situation. There’s no wrong answer here! If you’re ready to become a homeowner, find out if now is a good time to buy a house.