Owning your own home: Many people consider it the American dream, but no dream is one-size-fits all.
While owning a home can increase your net worth, there are potential downsides as well: additional labor, hassle, and cost, to name a few. So in many cases, renting makes sense.
So how can you know which is best?
Last year, at what may turn out to be the very bottom of the housing market, Money Talks News founder Stacy Johnson did a story called Housing Has Bottomed – It’s Time to Buy. So he’s a believer. But he also knows before you can make a good decision, you need to consider both sides. Watch the following video, then read on for more.
Now let’s spend more time on the pluses and minuses of home ownership
Owning a home is a huge time commitment. When you rent, maintenance is someone else’s problem and repairs are solved with a phone call. When you own, you’re the maintenance man and gardener. When something breaks – and it will – it’s on you to fix it or find someone who can.
Then there’s the lack of flexibility. As Stacy said in the video, home owners should plan to keep a house at least five years, because transaction costs – agent commissions and other sales expenses – are high. The sooner you sell, the harder they are to recoup.
What you can do to make a rental property uniquely yours is severely limited.
One of the joys of home ownership is investing time to make it yours and make it worth more. What you can do to customize a home you own is limited only by your imagination, budget, and local zoning restrictions.
The bottom line: If you want to stay mobile, don’t enjoy home improvement projects, and don’t care that much about expressing yourself with your surroundings, rent. If you’re staying put and watch a lot of HGTV, buy.
If you rent a house you’ll pay the first month’s rent, a security deposit, and maybe a pet deposit. Buying means a down payment, closing costs, and other expenses far exceeding rent.
For example, I rented my house. Here’s the breakdown:
- First month’s rent – $750
- Security deposit – $750
- Pet deposit – $150
- Total: $1,650
If I bought the house for the average price in my neighborhood – $185,000 – Zillow’s Closing Cost estimator says I would have paid:
- Down payment – $37,000 (20 percent)
- Closing costs – $6,822
- Total: $43,822
Then there’s the additional monthly expense: The calculator says my monthly payment would be $990: $240 more than I pay now. And that doesn’t include insurance, property taxes, or maintenance.
According to the Insurance Information Institute, in 2010 the average annual homeowner’s insurance premium was $909 (or $75.75 a month). Property taxes vary widely depending on where you live, but run from hundreds a year to thousands.
When you pay rent, you’re making your landlord richer. When you gain equity by gradually paying off your mortgage, you’re making yourself richer. You’ve got to live somewhere, and that’s going to cost money monthly. Using those monthly payments toward a mortgage means in 15 to 30 years, you’ll own your home free and clear. Other than property taxes and insurance, you’ll pay nothing. How much will renters be paying every month 15 to 30 years from now?
Then there’s appreciation. Granted, our nation is still recovering from a housing crash, but declining home prices are the rare exception, not the rule. If past is prologue – usually a good bet - a house offers inflation protection and the opportunity to own an appreciating asset.
Uncle Sam also helps offset the higher cost of ownership. Mortgage interest and property taxes are (so far) deductible.
The bottom line: If you don’t have the money and/or credit score necessary to buy a home, the question is moot. But if you can afford to own a home in a desirable area with an expanding population, you’ll probably be rewarded.
Can an online calculator help with the decision?
One way to run the numbers is to use buy vs. rent calculators like these:
- New York Times – Is it Better to Rent or Buy?
- Yahoo! Homes – Should I rent or buy a home?
- Realtor – Rent vs. Buy
But I wouldn’t waste too much time on them. While certainly helpful, the answer you get from a calculator will depend on the information you provide – information you can’t possibly know.
For example, among other variables, most calculators will ask how much the house you’re buying will appreciate annually, as well as how much equivalent rent will increase over time. If you know the answers to these questions, you don’t need a calculator; you need a job on CNBC.
So use a calculator, but don’t count on one for definitive answers.
Buying? Don’t get in over your head
Leaning toward buying? To lower the risk of home ownership, buy what you need, not the max you qualify for. The average house in 1950 was less than 1,000 square feet. Today it’s more than twice that. Remember that whatever you buy, you’re going to have to furnish, heat, cool, insure, clean, and maintain it.
Don’t just be ready emotionally, be ready financially. If you have bad credit and only qualify for a high-interest mortgage, it will cost you tens of thousands of extra dollars over the life of your loan. And the more you put down, the less you borrow and the less risk you take. Build your credit and your savings before you build your house.
Finally, if you decide it’s time to buy, hope for appreciation, but don’t count on it. To increase your odds, buy in an area with rising employment. When the demand for housing (or anything else) outstrips the supply, prices rise. The single biggest factor influencing demand for homes? Jobs. If the community you’re living in has both expanding employment opportunity and population – easy factors to determine – prices are likely to rise over time. If you live in an area that’s shrinking, you’re probably better off renting.