Advantages of Buying
Buying a house comes with a unique set of pros and cons. Consider these advantages as you decide whether renting or buying is right for you:
- Equity. While you may not own your home outright when you buy it, the proportion of what you do own will increase as you continue to pay your mortgage. As the years go on, those payments allow you to build equity—that is, the difference between the home's fair market value and the outstanding balance of all liens on the property. You can borrow against this equity to finance major items, like a college education or a kitchen remodel. You could also see a return on that investment when you sell your home, if there is money left over after paying off the mortgage and closing costs. When you rent, you won’t have an asset to show for it at the end of your lease.
- Tax advantages. As a homeowner, you may be able to deduct all interest paid on your mortgage (and other fees incurred during the year you buy your home) on your tax return. Home equity loans also may be tax deductible. In addition, the real estate taxes on the home you live in and a vacation home may be fully deductible. Talk to your tax advisor for details.
- All the comforts of home. When you own your own home, it’s yours. While you may have some restrictions if you’re part of a homeowners association, for the most part, it’s yours to decorate any way you like, yours to renovate (or not!) and yours to build memories in. Homeownership allows you to set down some roots, and there is a certain security in living in a home that you own.
It all boils down to knowing your needs and wants and making a financial decision that fits your goals and lifestyle.
Advantages of Renting
Just like buying, renting comes with its own set of pros and cons. Here is a look at the advantages of renting:
- More cash on hand. Even if a mortgage on a comparable home might be the same monthly rent payment, additional costs such as taxes, homeowners insurance, increased utilities and maintenance can make it more expensive.
- Amenities, with low or no maintenance. If you rent an apartment or condo, you can likely live in a landscaped community without so much as a lawn mower. You won’t be spending your weekends (or your money!) taking care of a leak or replacing the furnace. Depending on where you live, you may have access to amenities you otherwise might not be able to afford, such as an in-ground pool, fitness center or game room—and no requirement to maintain them.
- Flexibility. Not sure where life will take you next? It’s easier to pack up and move without the stress and costs of selling a home. When you’re living in a new location for the first time, renting enables you to get to know the area without a long-term commitment.
- Safety from market fluctuations. When home values dropped after the 2006 peak, many homeowners were left “underwater” or “upside-down”—owing more than their homes were worth. By renting, you avoid this issue.
|Advantages of Renting||Advantages of Buying|
|More cash on hand each month||Building value in an asset you own
|Low or no maintenance||Opportunities to decorate and renovate|
|Flexibility to move easily||Yearly tax advantages|
|Safety from market changes||Ability to purchase an expensive asset with a comparatively small down payment|
When you’re determining whether renting or buying makes the most sense for you, keep in mind that a mortgage is a long-term commitment.
Dedicating too much income toward housing can make it hard to meet other financial obligations or save money. When people buy more home than they can comfortably afford, the result can be feeling “house poor” (a term used to describe those who spend an abnormally large proportion of their income on the costs of homeownership), thanks to mortgage payments, property taxes, insurance, maintenance and utilities.
Rules of thumb depend on who you ask, but you should generally aim to keep your housing-related costs to below the Federal Housing Administration’s required minimum of 31% of your gross income. Test your budget with different scenarios: What happens if you lose your job? If you add to your family in five years? Become disabled? Solid upfront planning can help set you up for long-term financial success.
Rent vs. Buy Calculator
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