With mortgage rates still hovering near all-time lows and the housing market slowly beginning to heat up, you could easily argue that there’s never been a better time for buying a home.

Thanks to tighter lending restrictions, however, and an economy that’s still largely in recovery mode, the American dream of owning a home has changed somewhat for many would-be buyers.

The number of people choosing to rent rather than buy has surged over the past few years and as of 2013, there were about 43 million renter households in the U.S.
While there are some definite advantages that go along with renting, rising demand for properties has pushed rental rates to new highs. Nearly half of middle-income renters are shelling out 30% or more of their pay on housing.

With the cost gap between renting and buying a home narrowing, it’s worth wondering if it’s time to make the leap into home ownership. Here are a few important things worth thinking about when you’re considering renting or buying a home.

How the cost compares

Whether it’s cheaper to rent or buy is really subjective and it depends on several factors, starting with where you live.

According to Trulia’s 2014 Rent vs. Buy Report, owning a home is actually 38% cheaper than renting on average, at least in the nation’s 100 largest metro areas. While that seems like a pretty big difference, the numbers vary when you take a closer look. In Detroit, for example, buying is actually 66% cheaper compared to just 5% in Honolulu.

If you’re thinking of buying a home, focusing on just the monthly mortgage payment won’t give you an accurate idea of what it costs. You also have to take into account things like homeowners insurance, property taxes, repairs and maintenance. There’s also the down payment and the closing costs to keep in mind. These are things you don’t have to worry about when you’re renting so it pays to have the most complete financial picture possible before making a final decision.

Consider your time frame

Buying a home is a long-term commitment that typically requires a significant amount of time and money.
Depending on the size of your mortgage and how much money you put down, it can take anywhere from three to seven years to recoup the initial cost.If you end up having to move before you’ve reached the break-even point, it directly affects how much profit you’re able to realize on the sale.

With renting, on the other hand, you’re not as limited by a physical location. If you get a better job offer in a different city, for example, you may be on the hook for any remaining rent due under the terms of your lease but there generally aren’t tens of thousands of dollars on the line.

If you end up having to move on short notice and your home doesn’t sell right away, you could be juggling two house payments which can put a real strain on your budget.

Weighing the investment argument

Most financial experts agree that a home is an investment but you shouldn’t let that alone sway you into buying a home. While it’s true that owning versus renting means you’ll be building equity in the property, the housing market collapse is proof that home values can fluctuate drastically. Millions of homeowners saw their equity disappear seemingly overnight and only in the last year or so have values begun to climb.

As the home gets older, you may see your equity increase as you chip away at the mortgage but you’ll be putting more back into the property for maintenance and upkeep. The cost of keeping the home may eventually reach the point where it cancels out any gains on your investment.

When you’re renting, you’re not creating any ownership value in the property for yourself but you’re also not responsible for all the added costs that go along with it.

There is a potential upside however, if you find that renting would be less expensive than buying. You can take the money you’re saving each month and invest it in stocks or mutual funds so you’re still seeing some kind of growth.

Owning means a tax break

One of the ways that homeowners are able to offset some of the costs of buying a home is by claiming a tax deduction for the interest they pay on their mortgage.
For 2014, you could deduct the interest paid on loans valued at $1 million or less, or $500,000 if you’re married and filing separately. You’ll have to itemize to claim the deduction but it can add up to some serious tax savings once April 15 rolls around.

Rent, on the other hand, usually isn’t deductible unless you’re using part of the property as a home office.

Bottom line of renting vs buying a home

Whether it’s smarter to rent or buy really comes down to what’s the best fit for your lifestyle and your financial situation.

If you know that you’ll be ready for a change of scenery down the road or you’re planning to expand your family at some point, there may not be a need to rush into buying a home. The same is true if you’re comfortable with the amount of money you’re paying to rent and you don’t feel like dealing with the extra hassles of owning a home.

On the other hand, mortgage rates won’t stay low forever and the longer you wait to buy, the greater the risk that rates will rise sharply. If that happens, you’re looking at paying more for the cost of your home in the long run.

There’s always the possibility of refinancing once rates drop again but it’s not guaranteed. Buying a home usually makes the most sense when you’re planning to stay put for awhile so if you’re ready to settle down for the long haul, there may be no better time than the present to start shopping the market.

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