Renting vs. Buying – Pros & Cons of Both
Costs of Buying & Owning Your Home
When purchasing a home, there are several upfront costs. Some of these are paid out-of-pocket once the seller accepts your purchase offer, while the rest are paid at closing.
Earnest money: It is traditional to accompany an “earnest money” check with your purchase offer to let the seller know that you are serious about purchasing the property. The amount of an earnest money check usually ranges from 1% to 3% of the home’s purchase price. Once the offer is accepted, the seller deposits the earnest money check into an escrow account, and the funds are credited against your closing costs.
Down payment: A down payment is a percentage of the purchase price you pay upfront, usually at closing. In your purchase offer, you will need to specify a certain down payment amount, although you can change this amount before closing if the seller agrees. The amount of your down payment will vary depending on several factors including your credit history, local market conditions, and the type of mortgage loan you are approved for. However, this amount typically ranges from 3.5% to more than 20% of the purchase price.
Home appraisal: Lenders require a home appraisal before approving the loan to ensure that the offer price is equal to the value of the home. Appraisal costs are paid during or before the appraisal and usually cost $300 to $500.
Home inspection: It is highly encouraged for a buyer to hire a licensed home inspector to look for potential problems and defects. It usually costs around the same as an appraisal and is generally paid at the time of the inspection.
Property taxes: Property owners pay property taxes upfront, generally in six-month increments. You need to compensate the seller for taxes they paid on the period between the closing date and the end of the current tax period. Depending on your local tax rate and the closing date, this number varies widely.
First year’s homeowner’s insurance: Before closing, lenders require proof of homeowner’s insurance. It is almost always required to pay the first year’s premium upfront, either on the date you buy the policy or at closing. The cost of homeowner’s insurance not only varies based on the value, style, location, and contents of the home, but varies depending on your credit score, policy deductible, and coverage limits as well.
Other closing costs: Some of the other closing costs include loan origination charges, credit report fee, flood certification fee, lender’s and owner’s title insurance, recording taxes, state and local transfer taxes, first month’s mortgage interest, and closing fee.
Recurring Expenses
Loan payments: You are required to make monthly principal and interest payments during the life of your mortgage loan, which are typically either 15 or 30 years. Your payment remains the same each month for the full loan term if you have a fixed-rate mortgage. With adjustable-rate mortgages, your rate gets tied to a benchmark and your payment will vary as the benchmark changes.
Property taxes: To help pay for local schools, infrastructure, and other important services, your city or county sets property taxes. These rates will vary widely depending on location and tend to change from year to year. Your property taxes are part of your monthly escrow payments – each month you pay one-twelfth of your annual tax burden.
Homeowner’s insurance: The amount of your homeowner’s insurance premium can vary year to year based on your home’s appraised value, the policy’s deductible and coverage amounts, claim history, and your credit score. According to the National Association of Insurance Commissioners, the average annual homeowner’s insurance premium is $1,192.
Private mortgage insurance: Your monthly escrow payment will initially include a private mortgage insurance (PMI) premium payment if you used a private mortgage lender and your down payment was less than 20% of the purchase price of your home. If your home is foreclosed upon and is sold at a discount relative to your purchase price, private mortgage insurance protects your lender from financial loss. Monthly private mortgage insurance payments usually range from $50 to $200, depending on the balance of your loan and PMI rate.
Utilities: When you own your home, you are responsible for paying all utilities like water, gas, electric, garbage and recycling, cable and internet, etc. Depending on location and usage, these costs can vary widely.
Maintenance: All home maintenance and upkeep are also your responsibility when you own your home. Some of this maintenance includes replacing worn-out fixtures and appliances, exterior painting and finishing, interior cleaning, HVAC cleaning, etc.
One-time or special costs
Furnishing: If you are buying your first home, chances are that it is probably bigger than your previous space. Even if you own furnishings in your rental, you’ll need to buy furniture and fixtures for your new home. Depending on your budget, the cost of purchasing furniture will vary. A great way to save some money is to purchase secondhand fixtures and furniture.
Moving costs: The cost of moving will depend on what method you choose. For example, you could hire a team of movers or you could rent a moving truck. Either way, the cost of moving can range from $100 to $200 all the way up to $1000, depending on how much stuff you need to move and what you are able to move on your own.
Repairs: If your insurance doesn’t cover the entire cost of a repair, you are financially responsible for paying the remaining balance. For example, if there is exterior flooding causing your basement to sustain water damage and you do not have a flood insurance policy, you must pay out-of-pocket for any water damage or mold remediation costs.
Improvements/Renovation Projects: You must pay out-of-pocket or take out a home improvement loan if you are looking to begin a home improvement or renovation project. The cost of these kinds of projects varies on a large scale. Projects like a full kitchen remodel or adding an extra room can easily cost $20,000 or more, while adding a fence around your yard or adding new porch furniture may only cost a few hundred dollars.
Costs of Renting a Home
There are fewer upfront expenses when you rent because it does not involve a costly purchase process. However, you may still face some costs before or soon after moving into a new rental.
Security deposit: In order to insure against property damage such as repairs, delinquent rent, broken leases, etc., landlords require you to pay a security deposit. Many states limit the security deposit amount to 1.5 times the monthly rent.
First month’s rent: It is typical for landlords to require the first month’s rent to be paid upfront. Your landlord may prorate the rent payment if you are moving in during the middle of the month.
Nonrefundable deposits: You could be charged nonrefundable deposits in addition to your security deposit depending on the rental property laws in your state, your living situation, and your landlord’s preferences. For example, if you have a pet, it is very common to pay a pet deposit. Depending on the type of animal, pet deposits generally range from $100 to $500.
Moving costs: Similar to purchasing a home, you will need to pay to move your belongings. Again, whether you are hiring movers, renting a truck, or asking friends for help, this is an expense you should keep in mind.
Recurring Expenses
Monthly rent: Your rent may increase whenever you sign a new lease, unless of course you live in a rent-controlled neighborhood or a city with firmer renter protection laws. The cost of rent varies widely depending on several factors such as the local market conditions, number of occupants, and the size, condition, and location of the rental.
Pet rent: If you have a pet, it is possible that your landlord will require additional pet rent each month instead of a pet deposit – they may even require you to pay both pet rent and a pet deposit. The price of pet rent will vary depending on the type of animal, but usually ranges from $10 to $40 per month per pet.
Renter’s insurance: It is highly recommended to carry renter’s insurance to protect against loss due to theft, fire, and other hazards. The cost of renter’s insurance is based on several factors, including the value and nature of the insured property, coverage limits, and deductibles, to name a few. According to PolicyGenius.com, the average monthly cost of renter’s insurance is $15.
Utilities: The utilities you are responsible to pay vary depending on your landlord and region. Some landlords will include all utilities in the monthly rent, while other landlords require the tenant to pay most or all the utilities.
Laundry: This is another expense that will vary depending on your rental. Some places come with in-unit laundry, other places have washers and dryers in the building that you pay to use, or you may have to go to a laundromat. Pay-per-use laundry facilities typically cost $2 to $4 per cycle.
Advantages & Disadvantages of Buying a Home
Advantages
1. Building equity over time: On most mortgages, a fraction of each monthly payment is used toward the loan’s interest. The rest of the payment is contributed to the loan’s principal. The money you put towards the principal represents your equity, which is your actual ownership of the property. When you get to 20% equity, you have the option to refinance your mortgage to obtain a lower interest rate or longer repayment period.
2. Tax benefits: There are a number of tax benefits that are specific to homeowners, however not all homeowners meet the criteria for all benefits. Here are the most prominent benefits:
Homestead exemption: Several states excuse owner-occupied homes from a part of the property tax burden that would normally accrue. For example, Louisiana writes off the first $75,000 of a home’s value from property tax assessments, meaning that a $300,000 home in New Orleans is taxed as if it were valued at $225,000.
Federal tax deductions: Itemizing your federal income taxes allows you to deduct your property taxes and the interest paid on your mortgage, which reduces your overall income tax burden. This is especially beneficial for those in higher tax brackets. Renters do not have these benefits.
3. Potential for rental income: You can always turn your house into a source of income by renting out part or all of the property. You just need to be sure to follow all local rental property laws. If you friend is looking for a place, you could rent out your basement to them. You could also purchase and move into a new home, leaving the entirety of your other property free to rent out. You might even decide to go with short-term rentals by using Airbnb, VRBO, or a similar house-sharing platform.
4. More creative freedom: When you own your home, you are 100% free to choose your decorating, DIY projects, and home improvement ventures, as long as you’re following local building codes and homeowners’ association rules. You can paint walls, add new bathroom fixtures, remodel your kitchen, update your basement, or build a patio/deck, etc. You have full creative freedom when you are a homeowner.
5. Sense of belonging and community: Homeowners usually stay in their homes for longer than renters, so they are more likely to put down roots in their communities. This can happen in a number of ways such as joining a local neighborhood association, volunteering at a nearby community center, joining a school group, etc. When you are renting, you may choose not to do these things, especially if you are planning to move in a year or two.
Disadvantages
1. Possible financial loss: While owning your home builds you equity over time, equity does not equate to guaranteed profit. You risk a financial loss when you sell if the home values in your area decrease or stay flat during your tenure as a homeowner, bringing down the appraised value of your home.
2. Liable for maintenance and repairs: You must pay the cost of maintenance and repair work that is uninsured. This amount will vary from year to year, but you can expect to pay around 1% of the value of your home each year on repairs and maintenance.
3. Purchase of furniture: You will need to spend time, money, and energy on furnishing your new home, unless your previous space was similarly sized and fully furnished.
4. High upfront expenses: Even though the upfront costs of purchasing a home vary greatly, you can expect to pay at least 5.5% of your home’s value before moving in.
Advantages & Disadvantages of Renting a Home
Advantages
1. Not accountable for maintenance or repairs: When you rent, you are not responsible for the cost of maintenance or repairs. If a pipe bursts, stove stops working, or toilet backs up, you only have to call your landlord and they take care of it.
2. Relocating is easier: If you are relocating for work, it is much less time-consuming and most often less costly to rent. It is much easier for you to relocate if you rent because you don’t have to worry about the time and effort it takes to sell a house.
3. No exposure to real estate market: Changing economic conditions can cause home values to fluctuate. When you rent, this becomes your landlord’s concern.
4. Typically, less strict credit requirements: It is usually standard for potential renters to undergo a credit check. You will most likely be able to find a landlord willing to rent to you, as long as you don’t have a checkered credit report with bankruptcies and judgments. By contrast, it is very common for mortgage lenders to have high credit standards. In many cases, credit scores lower than 680 or 700 are viewed as sub-prime.
5. Some utilities may be included: Some landlords will cover some or all the utilities such as water, gas, trash, etc.
Disadvantages
1. No equity built: Regardless of how long you stay in your rental or how great of a tenant you are, you cannot build equity in the property under a standard lease agreement. If you are planning to stay in the same location for more than a few years, buying might be a smarter choice than renting.
2. No federal tax benefits: If you own your home, you can deduct property taxes and mortgage interest on their federal income tax returns. Renters don’t qualify for any housing-related federal tax credits or deductions.
3. Restricted control over ongoing housing costs: Unless you live somewhere with rent control laws, your landlord can increase your rent once your current lease ends. There are many reasons why a landlord raises rent, such as matching rent prices elsewhere in the market or to urge current tenants to vacate the property instead of signing a new lease. You are less likely to face hefty rent increases if you maintain a good relationship with your landlord.
4. Limited housing security: While many jurisdictions have a large amount of renter protection laws that prohibit landlords from evicting without cause and are required to give adequate notice when the tenants will not be given an option to renew their leases, there is no law that entitles you to remain in your rental indefinitely.
Source: https://www.moneycrashers.com/rent-or-buy-a-house/