Should I buy or should I rent? The answer isn’t always simple and there are numerous variables that need to be considered, but making the right choice could benefit you significantly. So let’s look at homeownership first.
Homeownership – Benefits
The most obvious benefit of homeownership is accumulation of wealth over time. Each monthly payment you make, equity is accumulating – almost like a forced savings plan. Over longer terms, buying is in fact cheaper than renting. Also, the interest you pay each year is fully deductible on your taxes, both for your mortgage and any home equity lines as well. Other benefits include:
- Capital gains exclusion up to $250,000 for singles and $500,000 for married couples on profits from the sale of a home.
- Mortgages are fixed therefore your costs are predictable and more stable. Your monthly payments will stay the same for the entire period of the loan, making it easier to plan and budget.
- You can take pride of homeownership – you’ll have a place that is uniquely yours that you can customize however you please.
- With today’s low interest rates, mortgage payments are generally lower than rental payments.
Homeownership – Disadvantages
Owning a home is not always the right decision. It is a long-term financial commitment, so the ability to leave an area quickly and easily can be negatively impacted. You should also be prepared for the responsibility of maintaining your property that can be costly. Other disadvantages include:
- Fixed mortgage payments are generally higher than rent payments when interest rates are high.
- Property values could depreciate – your home can lose value for a number of reasons such as economic conditions or a drop in neighborhood home values.
- Buying a home requires a down payment, closing costs and moving expenses.
- The value of your home may not increase – especially during the first few years.
Renting – Advantages
If you don’t have access to the capital needed for the down payment and you need the flexibility to be able to move to another area easily, then renting may be your best option. Renting tends to provide more flexibility as well since leases are usually for 12 months. The landlord is responsible for performing all maintenance and repairs, so you won’t bear the additional financial burden associated with these. Typically, renters also have access to other amenities such as fitness centers, play areas, pools, tennis courts, etc. Other advantages include:
- No home loan debt
- No real estate taxes
- Lower initial costs
- Lower insurance costs
Renting – Disadvantages
The most significant disadvantages of renting is that your monthly payment is not building equity in an asset nor are you able to take advantage of tax incentives associated the interest paid on your mortgage or home equity line of credit. Renters also do not have fixed housing costs, and you may not be able to renew your lease on the same or similar terms and conditions. This may result in an unplanned rent increase or having to vacate the property. Other disadvantages include:
- Restrictions on house renovations or major decorative changes
- Limited or no financial incentives
- No incentive to improve or decorate the property from a financial perspective as any gains go straight to the landlord