You've Been Told Owning a Home Is Better (Financially) Than Renting. But Is That True For Everybody?Housing
Buying a home is one of the biggest financial decisions that you will make in adulthood and for many people, this may be seen as a part of the “American Dream.” While it can feel good to own something rather than rent, it’s not for everybody and can come with costs and limitations.
If you’re having a hard time deciding which option is best for you, consider the pros and cons of owning a home versus renting.
Advantages of Homeownership
Owning a home is a hefty goal for many people, but it can come with several important advantages.
#1: Long-Term Investment
It’s important to think long-term during the homebuying process. As a general rule of thumb, people are encouraged to purchase a home if you plan on staying there for five years or longer - as this gives your property time to grow in value.
Plan on maintaining or improving the condition of your property, as this is what makes for a good long-term investment. Even if the value of your home depreciates over time, it’s possible the land could become more valuable.
#2: Building Equity
Equity is the difference in the value of your home and what you still owe on it. Every time you put a payment toward your mortgage, your home equity grows. Equity is important to have, as it can help you build wealth over time.
#3: Stability & Consistency
Obtaining a fixed-rate mortgage means that you will pay the same amount each month for interest and principal until the mortgage has been paid off. Conversely, rent can increase with every lease renewal or move. Having a stable mortgage payment can help you avoid increases in your housing expenses.
Since you own the property, you can renovate it however you want. Renters do not enjoy this benefit, meaning any landscaping or home alterations wouldn’t be up to them. Being able to renovate and update your home gives you the potential to increase its property value and overall satisfaction while living in your home.
Disadvantages to Homeownership
There are some notable disadvantages to homeownership that any potential home buyer should keep in mind.
#1: Upfront Costs
Closing costs on a mortgage generally run between two percent and five percent of the purchase price. Depending on the price of the home, this can be a significant amount of money.
Some closing costs include:
- Property taxes
- Mortgage insurance (if less than a 20 percent down payment is made)
- Home inspection
- First-year insurance premiums
- Title search
- Title insurance
While a downpayment is important, it’s not the only cash you’ll need upfront in order to purchase a home. If you’re purchasing a $300,000 home, closing costs could easily range between $6,000 and $15,000.
#2: Less Flexibility
If you have a job that requires you to move often, going through the process of homebuying may not make financial sense. It can take weeks or months to buy and sell a home. If you must relocate quickly, this can mean paying multiple mortgages as you work to sell your home.
#3: Maintenance Costs
If something breaks in your home, you are the one that has to pay for the repairs. There is no property manager or landlord involved when you own your own home.
#4: Property Values Can Fall
If you do not maintain your home - or if the housing market takes a downturn - your property value may fall. There is no guarantee that your home’s value will increase. There are a number of factors both in your control and outside of it that could affect this.
#5: Home Costs Lack Liquidity
While houses do have value, they usually do not sell as quickly as stocks or other assets. Even if you are in the process of trying to sell your home, you still have to maintain your home and make mortgage payments.
Advantages of Renting a Home
Depending on what you are trying to achieve, renting may be the right option for you.
#1: Costs May Be Lower
Depending on your living needs and current financial situation, it may be more cost-effective to rent a room in a shared home or a modestly sized apartment. You may also find rentals already furnished, meaning they already include furniture.
#2: You Aren’t Responsible for Repairs
If you are maintaining a budget, then you won’t need to factor in-home repairs, as that is paid for by the property owner or landlord.
Relocation for something such as a job change can be much more difficult with a mortgage. If you do not sell your house as quickly as you would like, you will be paying a mortgage at your old home plus the new one. With rentals, you have the freedom to leave once your lease is up, or your landlord may allow you to find someone to take over your lease for you.
#4: Lower Upfront Costs
In order to secure a rental, you’ll likely be asked to put down a security deposit. This is usually equivalent to first month’s rent or several months' worth of rent. Unlike obtaining a mortgage, you don’t have closing costs and you may avoid other fees like HOA dues, painting supplies or other renovation costs.
Disadvantages of Renting
While there are many advantages, there are some things to keep in mind if you are looking to rent.
#1: No Renovations or Alterations
Even if you would like to make updates or additions to the rental property, you are not able to since you don’t own it. Some landlords may allow you to paint or make minor adjustments, but these would need to be approved beforehand.
#2: Your Rent May Increase
If you have been budgeting and factoring in a certain amount of rent each month, this amount may change when it’s time to renew your lease. Landlords have the right to increase your rent when it’s time to renew your lease, although you may be able to renegotiate the terms.
#3: It Won’t Improve Your Credit Score
Paying your mortgage on time every month can be an effective way to improve or maintain your credit score. Paying your rent on time each month is important, but it won’t necessarily improve your credit score.
#4: Your Home Isn’t Building Value
Because the home you are renting isn’t yours, the money you pay in rent isn’t working toward building equity.
Every individual has a situation that is unique to them, so for some people, it may make sense to purchase a home while others will benefit from renting. The pandemic has certainly changed the way that we live, so this can come into play when trying to decide what your next move should be.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
Paradigm Advisors is a fee-only financial planning firm based in Dallas, Texas and Fayetteville, Arkansas. Paradigm Advisors provides comprehensive financial planning and investment management services to help clients organize, grow and protect their wealth throughout life’s journey. Paradigm specializes in advising well-established career executives through financial planning and investment management. As a fee-only fiduciary and independent financial advisor, Paradigm never receives commission of any kind. Paradigm is legally bound by certification to provide unbiased and trustworthy financial advice.