The housing market keeps sailing along. The only headwind that could take it off course is the lack of inventory for sale. The National Association of Realtors (NAR) reports that there&
Is It Better To Rent Or Own A Home
Dated: June 20 2018
Choosing where to live is an undertaking at times but choosing whether you’d be better off purchasing a home or leasing a home is an important factor to consider as well. There are pros and cons to each option, so which is better for your situation and needs? Is the “American Dream” part of your dream? Does it make financial sense for you? Does it fit your lifestyle? One of the biggest arguments out there is whether it costs more to rent a home or own a home, and you’ll hear strong cases for each. Here are the facts- you must live somewhere, and that somewhere is going to cost a pretty penny each month either way.
While there is no way to predict with certainty what any real estate market will do, historically home values tend to increase at a modest rate over time as you pay down your loan, so equity is earned. There are some calculator tools online that can help you estimate the potential equity you’d gain to determine whether you’d make money or lose money if you owned a home. These tools can be valuable when comparing the money you’d spend on rent with the money you might earn in equity. Aside from the investment argument, renting a home is often seen as more flexible than owning and requires less maintenance since most of that is the owner’s responsibility. Lower maintenance is certainly appealing to many people in our busy society, and flexibility… well we’ll get to that. Here are some additional considerations to help you make a fully informed choice, when the time comes to choose.
Do the dollars and cents make sense? When looking at the finances, there are a few key factors to consider. Plan for about $1,200 for inspections and appraisal, or $1,500 if the home has a pool, and about 3% of the total purchase price for closing costs, unless you plan to finance those in to the loan (this comes with some restrictions, depending on the loan type and amount). When renting a home, you’re expected to pay at least 1 months’ worth of rent up front, sometimes more. The ability to qualify for a mortgage loan is obviously one of the most important considerations when deciding whether to buy or rent. Your parents might recommend saving 20% of the anticipated purchase price for a down payment, but this isn’t required. There are home loans that require far less. FHA loans require a 3.5% down payment, so they are very popular with first time home buyers. Some cities and counties offer down payment assistance programs for first time home buyers. These programs often require prospective home buyers to attend an education course and meet certain income requirements. Conventional home loans are available with down payments as low as 5%, and USDA offers home buyers in areas with lower populations a 0% down loan option. The biggest perk to a 20% or higher down payment is that mortgage insurance will not be required. Private Mortgage Insurance (or PMI) is an insurance policy that protects the lender if you default on your loan payments. The cost varies but runs between about .3% to 1.5% of the loan amount each year (broken down into monthly payments). Saving up for a 20% down payment is financially smart, but if home prices are increasing faster than you are saving, it may end up costing you more in the long run anyway. Discuss your options with a mortgage loan officer to see which make sense for you.
Taxes, Insurance, and Interest, oh my! Many articles and websites caution that homeowners will pay additional costs that renters won’t, including homeowner’s insurance, mortgage interest, and property taxes. The reality is, however, that you’re most likely paying those costs as a renter, too. You just don’t realize it because you’re paying them indirectly. If you own a home, it’s true that 50% or more of your monthly mortgage payment will be interest, taxes, and insurance. This is true whether you own a home to live in, or you own the home as a rental property. Loan or no loan, insurance and taxes are recurring costs of owning, and they will be factored in to the rent in one way or another. Rental owners are in it for profit, so they’re going to want their costs covered. The mortgage interest will be a factor in the rent payment as well. The biggest difference is that the owner will enjoy the tax deductions for mortgage interest and property taxes. If the home was purchased with cash or the loan has been paid in full, the owner will still want to charge market rental rates, or close to them to maximize their earnings. Costs like utilities, trash pick-up, pest control, and lawn maintenance are defined as tenant expenses in many lease contracts, including the Texas Real Estate Commission’s standard lease forms, so they are costs you can expect to pay whether you own or rent the home you live in.
Flexibility to move, when needed. One of the top reasons people choose to rent a home instead of own is for flexibility. You may be early in your career and open to relocating, or just unsure what your future holds. When renting, you’re bound by a lease contract and must give the required amount of notice before moving out, and if this notice doesn’t align with the end of the lease term, there can be financial penalties for breaking the lease, like forfeiting your deposit. Depending on the language in the lease, you might even be on the hook for the full lease term’s rent, unless you’re moving due to very specific circumstances stated in the contract, like a military deployment. In contrast, a homeowner may list their home for sale at any time, without penalty. Depending on market conditions, the house might sell quickly, or might take a bit of time and money. If you find yourself with a need to move, you can’t always time the market to optimize your situation, so you have to deal with the current conditions. When moving for a job, there might be a relocation package to absorb some of the costs or even handle the sale for you. If not, you’re on the hook for agent fees and seller closing costs, HOA transfer fees, plus any repairs requested by the buyer or upgrades needed to make the home more appealing. If you’ve owned the home for less than 2 years, you could be subject to Capital Gains Taxes on profits exceeding a certain threshold- refer to the IRS or your CPA for more information on Capital Gains Tax criteria and exemptions. If you’ve got the equity, these costs might balance out, and even when subtracted from the sales price, you might find that you’ve profited from the sale of the home. If you don’t have equity, however, you would be required to bring money to closing to pay these costs and any loan balances not covered by the sale proceeds. The longer you own a home, the more likely it is that you’ll wind up walking away with money in your pocket.
Predictable payments. Rents are based on market conditions, just like sales prices. In a hot market, your landlord might decide to increase your rent a few hundred dollars per month because if you aren’t willing to pay it, someone else probably will be. When there’s more competition, they may have to lower rents to entice qualified tenants. The same is true for home prices- they’re based on supply and demand. There are 4 components to a typical mortgage payment- principal, interest, taxes, and insurance (often referred to as PITI). If you’re using a fixed rate loan to purchase, and most home loans are fixed, the principal and interest portion of your payment will never change. Taxes are based on the value of the home, and homeowner’s insurance is based on several factors, including construction costs, home values, and your credit. Because of this, the tax and insurance portions of your payment will fluctuate from year to year, but usually not by very much unless there is a dramatic increase or decrease in housing prices.
Freedom, baby! One of the most popular arguments for owning a home is the freedom to do what you want with it. Want to repaint? Go for it! Don’t like that wall there? Tear it down! (But consult an architect first, to make sure it’s not holding the house up. That could be bad.) Most leases won’t allow you to paint or do any home improvements without permission from the owner first, and any added value to the house stays with the owner if you do. While repairs might be a hassle and expense, people who love to decorate and do DIY projects will enjoy more creative freedom in their own homes. That freedom goes beyond the latest styles from Chip and Jo, however. Traditional leases also limit pets, guests, and even parking. Homeowners may have some limits in the form of an HOA and city codes but will have far more freedom to do as they please on their property. So, if you want to raise pit bull puppies, you won’t have to ask permission, pay additional deposits, or run into any breed restrictions like you would in a lease.
GroupWatson agents are equipped to help you find the perfect home to rent or purchase, once you’ve decided which one works best for your lifestyle. Not sure? We can help walk you through each aspect in more detail.
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Christy grew up in West Texas and is a graduate of Texas Tech University with a bachelor’s degree in Family Studies. She and her family have been residents of The Colony, TX for 3 years and are very....