When I first moved out on my own, I was resigned to the fact that I would have to rent. I admired that my parents had always owned their own home for as long as I had been alive.
I saw the hard work that they put into maintaining and remodeling their homes, and I wanted to have the same experience one day. Unfortunately, I didn’t have the savings or the credit score necessary to purchase my own home at the age of eighteen.
I moved into an apartment and several rental homes over the years, but I never gave up on the dream of homeownership.
After buying my first home, I realized that owning a home was a challenge, and while it had its advantages, there was still a small part of me that missed renting. I guess my parents made it look easy!
I found out the hard way that renting did indeed have some major perks over buying, but that doesn’t mean that you need to as well.
If you are trying to decide whether you should rent or buy a home, you need to take time to look at it from every angle. Buying a home may work for some, but for others, renting a home might be the superior option.
Before you make a major decision, be sure that you understand all of the potential pros and cons of each option.
Pros and Cons of Buying a Home
For many people, buying a home is a lot like finding the holy grail. They work hard for years to take that major leap into homeownership. Is it really worth all of the financial preparation that goes into the process?
Take a look at some of the advantages and disadvantages of buying a home to see if it might be right for you.
Pro: Building Equity
When you purchase your own home, each monthly mortgage payment you make helps you to build equity in the property. Equity is the difference between what you owe on the home and how much that home is actually worth.
For example, let’s say that you owe $200,000 on your property but it is actually worth $250,000. You would have $50,000 worth of equity in the home.
Each mortgage payment you make brings you one step closer to paying off your home. If you have a large amount of this equity built up in the property, you can use that extra money for a variety of future plans.
You can tap into that equity to help you move into a larger or nicer home in the future. If you can sell your house for what you paid for it (or more), you can take the money that you have been paying toward the principal and use it toward a down payment on the next house.
You could also do a cash-out refinance that would allow you take out some of the equity and use it toward anything that matters to you such as a home remodel or paying down other debt.
Pro: Stable Monthly Payments
Once you sign on the dotted line of your mortgage, most people have a fixed-rate thirty-year loan to pay back. This type of loan grants that you will have the same monthly payment on your home for the next three decades.
Your principal and interest payment will remain steady even if the housing market around you does not. You may still have some fluctuations based on taxes and insurance, but the payment on your home is stable.
If you opt for an adjustable rate mortgage, you might get a lower monthly payment and a lower interest rate for a short introductory period.
Eventually, this rate will increase after that set period ends (anywhere from three to seven years). An adjustable rate mortgage might be a good fit for you if you want a lower stable monthly payment and don’t plan to stay in the house long after the interest rates are set to increase.
Pro: Privacy and Freedom
Buying a home gives you the ultimate freedom to do what you want to do to your home. You can paint the walls, tear them down, or hang your favorite artwork on the walls. The home is yours to do whatever you want to do with it. Renovations are completely up to you, as long as you can afford them.
You also no longer have to put up with inspections or walkthroughs. Renters may be subject to both of these to ensure that the property is being well maintained. If you own your home, the only person you have to answer to is yourself.
This was one of the things I looked forward to most when we purchased our first home. No more annual inspections and handymen barging into our apartment unannounced!
Con: High Initial Costs
One of the major factors that holds many prospective homebuyers back from making a purchase is the high initial cost. You have to factor in closing costs which can run anywhere from 2 to 5 percent of the purchase price of the house.
Unless you are using a VA loan, you will also have to come up with a down payment that could range from 3.5 percent to 20 percent of the value of the property. This means that if you were buying a home for $200,000, you might need to put up $40,000. Not everyone has that kind of money just lying around!
As if that weren’t enough, you may also need to cover important fees like:
- One year of homeowner’s insurance
- Title insurance
- Home inspection
- Mortgage insurance
For some individuals and families, it can take years to come up with these funds, and it can take an equivalent amount of time to recover from the blow your savings account will take.
Con: Inability to Move Quickly
A key perk to owning your home is the stability that it offers. The flip side of that coin is that it makes it that much harder for you to move at the drop of a hat. If you prefer a nomadic lifestyle that allows you to travel from city to city on a whim, you may not be well-suited to owning real estate.
It is true that you could sell the property and move on. However, you must account for the fact that this is not a quick process.
It could take weeks or months to receive an offer on your home and to close on the loan. In the meantime, you are still required to keep up with your mortgage payments and the maintenance costs associated with the property.
When we decided to sell our first home and purchase our second, we thought that it would be a smooth process. It started off simple enough with an immediate offer on the property. Unfortunately, it took us almost four months to close.
In the meantime, we were almost forced to make payments on both our old property and our new one. This would have left us financially strapped until the house eventually sold. It is possible to move, but it could be a time-consuming process.
Con: Responsible for Maintenance
If you are used to renting, the sudden responsibility for maintenance may come as a shock. Instead of calling your landlord or leasing office, you are suddenly on your own when the air conditioner breaks or you have a leaking pipe.
Maintenance is totally up to you, as is the cost of the repair. Keep in mind that you must keep up with both the interior and the exterior of the property.
Pros and Cons of Renting a Home
Renting a home does come with some substantial financial perks, but it too has its drawbacks. If the idea of owning a property still doesn’t appeal to you, you might want to consider what a rental has to offer you.
Here are some of the advantages and disadvantages of going through a landlord instead.
Pro: Lower Move-In Costs
The total cost of purchasing a home is enough to put some people off for years. It can be a challenge to save as much money as is required to cover the down payment and closing costs.
Renting is a cheaper alternative that is far more affordable to most people because you’re often not forced to put down a hefty initial payment.
Depending on your credit, you may be required to put down a security deposit that is usually equal to one month’s rent, but this is still going to be less than a down payment on a house. You can also avoid having to pay for monthly necessities such as HOA dues.
Pro: No Responsibility for Repairs
Is the hot water heater broken? Does your furnace have trouble keeping the temperature up on long winter nights? The good news is that you are not responsible for the repairs that are necessary to maintain the property.
All you have to do is call the landlord and have him arrange for a professional to come out and fix it. You don’t have to coordinate it and you don’t have to pay for it.
As a tenant, you do have some responsibilities in the maintenance of the property. You are responsible for the upkeep and cleaning of the house. It’s your job to prevent unnecessary wear and tear such as mold growth or soap scum buildup in the bathrooms.
It is also your job to notify the landlord if and when anything breaks so that they can promptly take care of it before the problem worsens. Overall, you have very few responsibilities as a tenant. This is one of the major perks of renting.
Pro: More Flexibility
If you know that you don’t want to live in this area forever, you might want to consider renting over buying. An imminent move will be easier if you are not locked into a specific property with a mortgage. Renting allows you the freedom to simply leave whenever your lease is up.
On the other hand, if you were to own your own home, you would need to wait for it to sell before you could move onto the next place so that you could avoid paying for two homes.
Con: No Equity
When you leave your rental, you will have nothing to show for it financially. You made your lease payment on time every month for years, but you have no ownership in the property.
In essence, it is like you have thrown your money away instead of allowing it to build equity that you could tap into in the future.
This is the biggest reason why we decided to stop renting and purchase our first home. It didn’t make sense to us to pay for our apartment each month and have nothing to show for it when we could be building equity in the purchase of our home.
It would allow us to work toward something so that one day we would not have to pay a mortgage at all.
Con: Rent May Increase
Instead of having a fixed monthly payment, you are only guaranteed the same rate for as long as your lease lasts. Every six months to a year (depending on your specific contract), your landlord reserves the right to raise your rent in accordance with fair market value.
This means that you could end up spending hundreds more when the time comes to renew – or you can pack your boxes and find somewhere new to stay.
This was a recurring theme for us when we were renting. We would be offered low rates on a decent apartment for the first year, but those rates would climb if we wanted to stay the following year.
We moved often to avoid the rate hike, but it would have been nice to have the stability that owning your own home can provide.
Con: No Home Improvements
Maybe the living is painted an awful shade of orange or the wallpaper in the bathroom is seriously outdated. I’ve lived in my fair share of apartments and rental homes that need some major cosmetic upgrades.
Unfortunately, most landlords do not want you to make any modifications to the home you are renting. You simply have to adjust to what you are given and make the best of it.
Con: No Credit Score Improvement
Credit scores are used by lenders to determine whether you are likely to repay the money that you borrow. A higher score qualifies you for more loans with better interest rates and terms. Ideally, you should always be working on this score.
Unfortunately, renting is not going to help much in terms of improving your score. Most landlords do not report your payment history to the three major credit bureaus so you don’t receive credit for your timely payment history.
Purchasing a home does reflect on your credit history and can help to boost your score.
When we were renting, we found out the hard way that our monthly payments didn’t count toward our credit score. We spent a long time trying to build up that score by making timely payments to our credit card companies, utility companies, and more.
The process of improving our score would have moved much faster if we had purchased a home sooner.
Which One is Right for You?
Now that you know the advantages and disadvantages to each, it’s time to decide: Should you rent or buy a home?The decision is going to be personal based on your unique situation and finances.
Here are just a few of the things you should consider before you make any major moves.
How Much Do You Have Saved?
The biggest disadvantage to purchasing a home is the amount of money required upfront to do so. The down payment in combination with your closing costs and other expenses usually totals into thousands of dollars.
Even if you purchase a modest home, a 3.5 percent down payment on an FHA loan can be a lot of money. Consider how much money you already have saved up to determine what you could afford to part with if you want to buy a home.
If you don’t have much saved up, then renting may be your only option for right now.
Remember that you may still have to have some money stashed away in savings for a rental. Most landlords will require a security deposit along with the first month’s rent. That security deposit is typically equal to one or two months’ worth of rent.
Do You Plan to Move?
The truth is that buying a home comes with certain costs that can be challenging to recoup if you want to sell the property quickly. Experts say that you should not buy a house unless you plan to live in it for a minimum of three years.
Selling it before the three-year mark means that you might lose out on the money you invested in real estate agent commissions and closing costs. Property values do not typically appreciate quickly enough in those first three years to make up for the money that you spent.
Furthermore, if you plan to move soon, purchasing a home will leave you tied to a specific place. Renting is the better option if you know that you don’t want to remain in the area long-term.
It gives you the freedom to pack your bags at the end of the lease without having to look back and worry about the sale of your property.
Tips for Renting
If you have decided that renting is the right route for you, then you need to be prepared to find the perfect property. It can take some time to find a worthwhile rental that meets your needs. Before you start shopping with a real estate agent, here are a few tips you might want to keep in mind.
Improve Your Credit Score
A lot of renters don’t realize that their credit score still matters to their landlord. Landlords and leasing offices want to be assured that you will make good on your rent.
Checking your credit score is one way that they do this since payment history is the biggest determining factor for your score. A higher score is likely an indicator that you are going to be a worthier tenant. You can still rent even if you have a lower credit score, but you might have some extra expenses.
Some landlords may require you to come up with the first and last months’ rent in addition to a security deposit.
Spend some time working on your credit score before you apply for a new lease. Set up your bills to autopay so that you never miss a payment.
Pay down some of your debt so that you have a lower credit utilization rate. Refrain from applying for new lines of credit just before applying for a new lease as this can negatively impact your credit.
Set a Budget
You might have thought that budgeting was only important if you were buying a house, but this is far from the truth. No matter where you live, you need to make sure that you can afford it.
Look for properties that will cost you less than one-third of your income. If you think that you might want to save up to buy a house in the future, try to keep your living expenses and rent as cheap as possible so that you can put more money back in savings for a down payment.
Tips for Buying
If you decided that purchasing a home is in the cards for you, you might be eager to get the ball rolling. Before you do, take some time to evaluate if you are financially ready for the next step.
You’ll need to evaluate your savings strategy, research your financing options, and understand your budget before you can start touring houses. Take a look at the steps you need to take to prepare you for homeownership.
Start Saving Right Away
The best thing you can do if you want to buy a home is to start saving as much as possible as soon as you can. Treat saving money as if it were another bill you have to pay.
Set up payments to go directly into your savings account on payday so that you aren’t even tempted to spend the money on frivolous items or entertainment.
I like to keep my savings account at a separate bank so that it makes it that much harder for me to access the funds without really thinking it through.
Research Your Financing Options
Many people are surprised to learn that there is more than one type of mortgage. Homebuyers have a number of financing options at their disposal including conventional mortgages and several programs that are backed by the federal government.
Each mortgage option comes with its own requirements for a minimum down payment, so knowing what you qualify for can tell you what you can really afford.
Here is a quick breakdown of what you can expect to find:
- FHA loans: 3.5 to 10 percent down payment
- VA loans: 0 percent down payment
- Conventional mortgage: 5 to 20 percent down payment
- USDA loan: 0 percent down payment on qualifying properties
When I was purchasing my most recent home, we were faced with choosing between an FHA loan and a conventional loan.
After running through the numbers with our mortgage company, we found that a conventional loan with a slightly larger down payment would actually save us close to $400 per month! Be sure to ask lots of questions and see if your mortgage company can put together payment estimates for you so that you can see the difference.
You might be surprised at how a change in mortgage product can really save you money on a monthly basis.
Figure Out What You Can Afford
Before you even go shopping or contact a real estate agent, you need to know how much house you can reasonably afford. As a good rule of thumb, housing expenses shouldn’t total more than 28 percent of your monthly income.
Take a good hard look at your budget to see how much money you bring each month and how much you are spending on your living expenses and debt. Be realistic with what you can afford to spend on a mortgage, if you can afford one at all.
It is best to have this number in mind before you start shopping. Knowing what you can afford can keep you from looking at houses that are way out of your budget and will leave you strapped for cash in the months and years ahead.
The Bottom Line
Deciding whether you should rent or buy a home can be tricky because it is so unique to each individual and family. If you have enough money saved up to purchase a home, it can be a great way to put your dollars to work building equity in the property.
You get the freedom to renovate and you’ll have stable monthly payments. However, you are also solely responsible for the maintenance costs and you will be stuck in the property until it sells if you were hoping to move quickly.
Renting is still a great option for those who don’t have the funds for a down payment and closing costs. You have lower move-in costs, more flexibility to move when and where you choose, and you are not responsible for the additional costs of maintaining the property.
On the other hand, you also do not have the freedom to make changes to the home, monthly payments can increase when you go to renew your lease, and it doesn’t always help your credit score.
If you think that you might be in the property for more than three years and you have a healthy savings account, now might be the time to buy.
Consider how much you can really afford and investigate the different mortgage options available to you. If now is not the time to buy, you can still get a great deal on a rental by improving your credit score and being a savvy shopper who knows what they can afford.
Either way, you can rest assured that you are making the right decision for your personal finances!
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