According to the Census Bureau, the U.S. homeownership rate has consistently hovered around 66% for some time, but this does not mean purchasing a home—rather than renting—is the right choice for everyone. The decision to rent or buy is one that can cause heated debates, and while the American Dream was to own a house with a white picket fence, that may not be the American Dream for people today. With that being said, both options carry significant pros and cons worth considering.
BUYING PROS AND CONS
Assuming you have the financial wherewithal (meaning sufficient funds for a down payment, closing costs and insurance, for starters), buying a home can bring several advantages, including:
- Equity Building: A home purchase is an investment that pays off through the accumulation of equity as you whittle down the mortgage and, hopefully, the property value increases. You can tap equity throughout the life of the mortgage by refinancing or obtaining home equity loans or lines of credit.
- Stability: As long as you keep up with your mortgage and property taxes, you generally do not have to worry about eviction.
- Full Control over Home Improvements and Upgrades: You can make your home your own. If you want to renovate or choose less traditional paint colors and such, you have that freedom.
- Tax Benefits: Homeowners can claim federal income tax deductions that renters cannot. If you itemize, you are allowed to deduct both your mortgage interest and property taxes.
On the other side of the coin, potential drawbacks include:
- Deduction Limits: Your deduction for state and local taxes like property taxes is limited to $10,000 per year. You generally are permitted to deduct mortgage interest on only the first $750,000 of your debt.
- Unexpected Costs: Homeowners incur a wide range of expenses. You can budget for many (for example, landscaping, insurance and HOA dues), but it is also on you when appliances break down, the roof springs a leak or the HOA imposes a special assessment.
- Price Fluctuations: If the market is strong in your area, home prices might not be within your reach. Or you could overextend yourself to land that dream home. Similarly, rising interest rates could make a mortgage unaffordable.
- Selling Your Home: If your circumstances change, you may find it hard to sell your home at the price you desire.
RENTING PROS AND CONS
Renting is often dismissed as throwing away money, but that is an inaccurate characterization — you receive the benefit of housing for your money. Other potential benefits include:
- Flexibility: Renting means you are much less tied down. You can move homes or geographic areas more easily.
- Lower Barriers to Entry: First and last month’s rent, plus a healthy security deposit, can seem daunting, but it is substantially less than the 20% down payment sometimes necessary to avoid the private mortgage insurance requirement. The credit rating requirements are less strict to rent than buy, too.
- Predictable Costs: You know how much your housing expenses will be every month. You will not have to cover unexpected repairs or maintenance, or shoulder property tax increases or higher payments on adjustable-rate mortgages.
- Free Time: Renters do not have to spend time mowing the lawn or researching plumbers. They do not have an endless list of home-related projects hanging over them.
But renting is not without its disadvantages, such as:
- Sunk Costs: While you do get housing for your rent payment, you also miss out on equity. You do not earn any financial “return” on your investment.
- Less Stability: With greater flexibility comes less stability. Your landlord can decide not to renew your lease, sell the property or convert it to condos, sometimes with relatively little notice.
- Potential Rent Hikes: Landlords also can raise your rent every lease period (subject to any rent control restrictions), and they generally do not take into account your income and other expenses, so an increase could prove beyond your means.
- Limited Improvements: Any improvements you make to a rental likely will require approval and definitely will remain with the landlord when you move.
Some questions you may want to ask yourself include:
- What can I realistically afford while taking into account my income and other expenses?
- How long do I plan to live here?
- What kind of loan do I qualify for?
- What are the property taxes like?
- Do I want the responsibilities that come with owning a home?
The considerations above are not the only relevant factors. Location, lifestyle preferences and personal goals also can affect your decision.