Buying vs Renting a Home

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Buying vs Renting a Home

Does it make more sense to rent than to buy? This has been a long-running debate in this country. However, the question is flawed: There is no right answer.

There may be times in your life when it does make more sense to rent. There will also be times when buying is the financially sound decision. The key is to look at your personal situations and the housing and rental markets before deciding which option is best for you.

The fact remains, though, that most U.S. residents prefer owning. It sounds corny, but owning a home largely remains part of the American dream. According to the November 2023 Home Purchase Sentiment Index conducted by Fannie Mae, only 14 percent of respondents believe it's a good time to purchase a home. The HPSI score increased by 7 points to 64.3 due to overall buying and selling conditions, job loss concern, and change in household income.

The markets

The fortunes of the housing and apartment markets are constantly in flux. One year, the housing market might see rising prices. The next, apartment rents might skyrocket. Before deciding whether it makes more financial sense for you to own or rent, make sure to consider market factors.

The National Association of Realtors' latest report states that the median sales price of existing homes stood at $387,600 towards the end of 2023. That is a 0.03 percent decrease from the prior year. At the same time, mortgage interest rates have risen significantly. According to Mortgage News Daily, the average interest rate on a 30-year fixed-rate mortgage loan was at 6.64 percent at the end of 2023. The prior year rate was 6.13 percent.

Meanwhile, apartment rents have been rising fairly steadily since 2011. At the end of 2023, the U.S. Median Asking Rent was at $1,967, which is a 2.09 percent drop compared to last year.

The average prices of both owning a home and renting an apartment are key factors to consider. Depending on where they stand, you might be more inclined to lean toward owning or renting.

Pros and cons of renting

When does it make sense to rent? You might be better off renting an apartment when you are just entering the workforce, or if you are unsure of your employment future.

Renting makes sense for people who are more likely to move in a short period. This is often the case with people who are just starting their careers. You may be assigned a job in a new part of town. You might find a better position in another part of the country. In either case, you want to be able to move in a hurry. If you own a home, you'll have to sell it. Selling a home can take months. If you rent, depending on when your lease ends, you can simply move.

Renting also makes sense if you do not have much available cash. Most conventional mortgage lenders require a down payment of at least 5 percent of a home's purchase price for those with excellent credit. For a moderately priced house of $200,000, that comes out to a down payment of $10,000. That is a lot of cash to scrape together. It might make sense to rent until you can save that down payment money.

Renting might also be a better option when you have a low credit score. Lenders depend on your three-digit credit score for loan approval and interest rate determinations. If you have a history of missed payments and high credit card debt, your credit score might be low. Lenders reserve their best interest rates for those borrowers who have FICO credit scores of 740 or higher. If yours is far lower than that, you might not qualify for a loan. Moreover, if you do, it will be at a high interest rate. It might make sense, then, to rent until you can boost that score by practicing good financial habits.

Renting also makes sense if you prefer the freedom of not having to do lawn work or home maintenance. When the heat goes out when you are renting, you call your landlord. When it goes out when you own a home, you call a contractor. Then you pay dearly for it.

There are some disadvantages to renting, however. First, you are at the mercy of the landlord, who can steadily raise your rent each year. You'll also never know if you rent an apartment directly under the noisiest family in your building. You also often have restrictions on how you can paint and decorate your apartment. You'll never build up equity when you constantly rent either.

Pros and cons of owning

Owning a home also comes with its pros and cons.

On the pro side, when you own a home, you build up equity. As you pay down your mortgage loan, you gain access to your home's equity. You can tap into that equity, often at low interest rates, to pay down credit card bills, help cover your children's college costs or fund a home renovation. When it is time to downsize, you can sell your home and take the profits from the sale to buy either a less expensive, smaller home or condo or take a trip around the globe. Owning gives you that financial freedom.

Owning also comes with tax benefits. Each year you can deduct the interest you pay on your mortgage loan. That brings a hefty deduction each tax season. While this is true for most home purchases, the 2017 Tax Cuts and Jobs Act altered individual income tax by lowering the mortgage deduction limit from $1 million to $750,000.

When you own, you can do with your house what you'd like. You can paint your bedroom red, add a third bathroom or convert the space above your garage into a home office. The choice is yours.

Owning, though, is not all positives. You'll have to pay, depending on where you live, hefty property taxes. You'll also be responsible for any repairs that pop up. With the possibility of leaking roofs, burst pipes, and sinking foundations, you can count on spending money on home repairs just about every year you own your residence. If housing values go down, you might end up owing more on your mortgage loan than what your house is worth.

The decision to buy or rent is a big one. It is important to look at your own financial and personal situations to make the right choice.

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