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Rent Vs Own
Dated: July 10 2019
Deciding where to live is tough enough, but you also have to decide whether to purchase your own home or rent on top of that! There are advantages and disadvantages to each, making the decision that much more complex. Consider the 4 F’s to help make you make a well-educated choice that best suits your needs and goals. And as always, our team is here to help you find the perfect rental or home to buy!
When considering the benefits of owning a home, freedom often comes to mind first. Homeowners have the freedom to paint the walls any color they’d like without needing permission, even knock them down if they want to (of course consult a structural expert before doing so for safety)! Don’t like the carpet? Want to add a porch? Plant a garden? Install a pool? Dream of shiplap on every wall? You’ll need the owner’s permission first. Own the home? Awesome, give yourself permission! Renting? You’re at someone else’s mercy, and your decorating dreams could be snuffed out before you’ve picked up your first paintbrush. As a homeowner, you can customize your house as much or as little as you like to make it uniquely your own. Most of the time those upgrades will increase the value of your home as well, as long as they have mass appeal. Homeowners also enjoy the freedom to own pets, run home-based businesses, or even rent the home to others. Most rentals will limit the number of pets and the breeds allowed in the home, in addition to pet deposit fees. Any changes to the home, like paint or flooring, will require the owner’s permission and the added value benefits the owner of the house, not the tenant. Leases often have restrictions on the number of vehicles that can be parked on the property, home-based business use, and subleasing as well. It is their house, afterall.
Moving when you want is a freedom homeowners enjoy as well. Market conditions will vary from year to year, but a homeowner can choose to list their home for sale whenever they want. They may have to wait a few months for it to sell, but that freedom is there. In addition, a homeowner can choose to move out of the house before listing it for sale, or even rent it out to someone else and become a landlord. Many landlords on the other hand will not allow a tenant to “abandon” the house by moving out and leaving it empty. The lease contract will define minimum move-out notice timelines and even penalties for moving before the end of the lease term.
On the flip side, if you are new to an area and want to test out a neighborhood before planting more permanent roots, renting allows you to live there for a defined term and then you can choose whether to stay longer or check out somewhere else.
If a major storm hits one evening and does damage to the home, as is sometimes a risk here in north Texas, the homeowner will be responsible for estimates, insurance claims, and repairs. If you’ve bought the home, that means it’s all on you. If you’re renting, that responsibility belongs to the landlord (or their property manager). Same for leaking water heaters, clogged toilets, failing air conditioners, and everything else in the house. There are Residential Service Contracts, often called “Home Warranty Plans,” that can help make the financial impact of a major repair more manageable, but the cost ultimately falls on the owner of the home. Calling maintenance and then kicking back in front of your favorite Netflix series is one of the biggest benefits renters get to enjoy, and often one of the reasons some choose to continue renting instead of owning.
It’s no secret that buying a home is a major financial commitment, but it's one that comes with some equally major rewards, too. Unless you pay cash, your home purchase will be financed with a mortgage loan. As you make payments on your mortgage each month, you build equity in your home by decreasing the loan balance- little by little. Equity is the difference between the value of something, minus the debt owed on it. Unlike cars that lose value the minute you drive off the dealer’s lot, homes tend to increase in value each year, further contributing to equity. Home prices increase (or appreciate) about 4% per year, on average. Some years they’ll increase more and some they’ll increase at a slower pace. Prices don’t often decrease, as long as the home is well maintained and the economy is stable. Still, equity doesn’t mean much while you’re living in your home, only when it’s time to sell, but rent is something you’ll never get back, period.
When you purchase a home, you’re agreeing to a set price, and the loan payments are based on that “principal” amount (the sales price minus your down payment, if any) and interest. With a fixed- rate mortgage, this amount will never change. If you set up an escrow account with your mortgage company, as most homeowners do, you’ll also be paying 1/12 of your annual homeowner’s insurance premium and property taxes with your mortgage payment in one lump sum known as a “PITI payment.” The taxes are based on the value of your home every year, and insurance is calculated using current construction costs, credit scores, and local risk so these can vary some from year to year. You won’t pay property taxes as a renter, at least not directly, and will have a much smaller insurance payment for renter’s insurance, if you have insurance at all. Renter’s insurance is far less expensive because it only covers your belongings, not the property itself. Homeowner’s insurance will pay to rebuild the entire home, if destroyed, in addition to paying to replace the stuff inside, and will usually pay to house you somewhere else while it’s being built.
Rental rates are usually determined by looking at market activity, supply, and demand. If there are a lot of people renting homes, and not many homes available, rents will increase. Likewise, if there are more homes for rent than tenants looking, rent prices are likely to decrease. But count on landlords wanting monthly rents to cover at least their total PITI mortgage payment on the home. They are in business to make money, afterall. Therefore, you’re still paying those costs as a renter, just not benefitting from the equity earned over time. And when the lease ends, if market demand is up and rents have increased, don’t count on the landlord keeping your rent at the same rate. Your rent cannot change during your lease term, but once that ends, the landlord can and usually will increase the amount to current market rates.
The old advice of saving up 20% of a home’s price for a down payment is wise, but isn’t required. Government-insured loan programs like FHA, and newer conventional loan programs allow buyers to buy a home with as little as 3.5% down. While some zero down payment loan programs still exist, buyers will need to pay closing costs that often exceed the rental deposit amount. In some cases, these closing costs can be factored in to the loan, though, so in those cases it could potentially cost more up front to rent. If the up-front cost is the only thing stopping you, talk to a loan officer to see what options you may have. Some first-time home buyer grants are available to assist with down payment and closing costs. A loan officer can help you estimate closing costs and monthly mortgage payments, if you’re considering a home purchase.
While no one can predict for sure what the market will do, if home prices increase at the national average, you’re likely to start profiting from your home purchase after just a one or two years when your equity grows to exceed your closing costs. If you think you’re likely to be in one area for longer than that, a loan officer can help you calculate how much equity you would earn so that you can truly compare costs.
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Lauren is a lifetime North Texas resident and graduate from Texas Woman's University. She currently lives in Prosper and has been working in and around her community for the past six years, resulting ....
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