Renting vs Buying
There a lot of things to consider when deciding whether to rent or buy a home. Because of the costs involved in the purchase of a home as well as the extra costs that come with homeownership, buying is not always the best option. Fortunately, there are many helps and calculators that prospective homeowners can use to make a wise financial decision before buying.
Coming up with a down payment is usually the first hurdle that buyers need to jump.
The preferred down payment is 20% of the purchase price of the home. This will also get you the best interest rate on the home. However, there are programs for first time home buyers as well as others such as veterans that can get your down payment as low as 3%. Sometimes buyers can get help with the down payment from family or friends but if the help is in the form of a loan instead of a gift the debt will be included in the lender's calculations for the buyer's debt to income ratio. If this tops 43% the buyer may be denied a loan.
The down payment serves multiple purposes. First, it gives the buyer equity in the home upfront which is not only a good thing for the buyer but the lenders on the loan feel more confident that the buyers will continue to make their payments to avoid losing this money. It also allows the buyer to purchase more house because that much will not be included in the debt required to purchase the home. If a buyer has $20,000 to put down on a house and the bank has approved them to get a loan for $100,000, the buyer can actually look for a home that costs $120,000. When a buyer has a higher down payment the lender is more likely to give them a lower interest rate on the loan which can have a significant impact over the life of the loan.
Other expenses that a buyer can expect to have to cover when purchasing a home are inspection fees and closing costs. It is always a good idea to have the home inspected before buying because of the hidden issues that might be uncovered. While the cost of $250-$500 or more, depending on the property, may seem like a lot to someone who is already committing a substantial amount of cash to the purchase, it is almost like a little insurance policy that they will not discover costly issues after the sale is finalized. Closing costs can be negotiated with the seller and can include title and recording fees.
Once the purchase is completed, the buyer will have certain regular monthly mortgage payments which will include both the loan principal and interest payments. They will also be responsible for paying for homeowner's insurance which lenders may require to be included in the mortgage payment as well as property taxes.
There are other expenses that come with home ownership beyond the expenses of getting into the home. When you own your own home, there is no landlord to call if the faucet leaks or the roof needs repairs. That is now your responsibility. If you are handy and can fix things yourself, you can keep the costs lower than if you need to call a contractor or handyman to do those things for you. But with ownership comes the financial risks that renters don't need to worry about.
Renters also have the advantage of knowing exactly how much of their budget is used up with housing costs. While sometimes their rents may go up, they can usually decide how much they want to pay and find something that fits their budget. In some markets the monthly rent is lower than what a house payment for the same property might be and in some markets it is higher. But knowing that you won't be hit with an unexpected expense to fix a leaky roof allows you to budget the rest of your disposable income for other things.
Some people prefer to rent because they can have access to amenities that they would not have been able to afford if they bought their home. Because of the addition of HOA fees on top of the monthly expenses the homeowner is already paying, a buyer may not have the option of buying in a neighborhood that provides a pool or gym or golf privileges. The maintenance costs for owners of these amenities can also be prohibitive.
Historically, home ownership has not been considered by financial experts as a sound financial investment. Other than the emotional reasons that people have for owning their own home, the best financial reason for buying is that it is a forced savings program for people who would otherwise spend the down payment and other expenses on homeownership. Even if an owner realized a continuous market increase of 3-4% on their home they would not realize the investment increase that the same money would accrue in other investments. If a person were disciplined and invested what a buyer puts into a home, they would have a higher net worth in the end. But most people aren't likely to do that and so owning real estate becomes the bulk of their financial portfolio.
Renters are also more mobile than homeowners. They aren't stuck in one neighborhood or city because the market is slow and they can't sell their house or they feel that they would lose money on the house if they were to sell. They don't have to stay home to water the garden or spend their vacation painting the house.
To rent or buy is a decision sometimes made as much on emotion as finances, but knowing your options can ensure that you make the best decision for you.