Buying a home is the American Dream. And with interest rates low, there is a favorable climate for buying now. According to the Northern Virginia Association of Realtors®, home sales in 2018 are up by 4% over the same time last year.
But as interest rates climb, home prices rise, and inventory continues to be scarce, it may be difficult for people to purchase a home. Other considerations may also make renting the right option.
So how do you know if it is better to rent or own a home?
Consider your Longevity
If you plan to live in your home for an extended period of time, then purchasing a house can be the best option, especially since home prices are rising (up by 2% over last year). Buying now will help you get into a desired neighborhood, whereas by waiting a few years, homes may be priced out of your range. You will also see the benefits of a higher selling price in a few years if you don’t stay in the home long term.
The biggest benefit to owning a home is the ability to build equity; the longer you stay in your home, the greater the equity you build. Accumulating equity can allow a homeowner to receive a larger profit when selling and offers the ability to use that equity for a home equity loan or a mortgage refinance once the equity amount reaches 20%. Improvements to the home can also increase a home’s value.
If you are planning to relocate within a short period of time, or your family or income circumstances are changing significantly, renting may be a better choice.
Consider the Costs
Home buyers must qualify for a mortgage, which includes principal, interest and homeowner’s insurance costs. If you don’t have 20% to put down on a down payment, you will also incur PMI, or private interest mortgage insurance, which can range up to 1.5% of your original loan amount per year, depending on your mortgage amount and your credit score. You must have a decent credit score to qualify for a mortgage in the first place and even a small dip in your credit score can lead to higher interest payments over the life of a loan.
On top of the mortgage payments, the homeowner is responsible for all the expenses of maintaining a home. If the HVAC system breaks or the roof needs to be replaced, those costs are paid out of your own pocket.
On the plus side, homeowners may qualify for tax deductions, as for mortgage loan interest, property tax payments and home business usage. When you sell your home, you can also take deductions for capital improvements and may exclude (up to the limit) capital gains on the sale.
Sample upfront costs to purchase:
- Earnest money deposit (1%-3% of the selling price)
- Down payment (preferably 20% of the purchase price or more)
- Appraisal (approximately $300-$500)
- Pre-sale home inspection (approximately $300-$500)
- Property taxes (reimbursement to previous owner or your own tax pre-payment)
- Homeowner’s insurance (first year’s payment up front)
- Closing costs (approximately 2%-4% of the purchase price)
- Possible homeowner association fees
Renting a home relieves you of the costs of home maintenance, however, your monthly rent may be higher than a mortgage would be, and is subject to yearly bumps. As a renter, you do not have the advantage of tax deductions on property tax and mortgage interest.
Even with renting, there are up-front costs. Most landlords require at least one security deposit along with the first month’s rent, and if you cause damage to the property, your landlord may withhold your security deposit to cover repairs.
Sample upfront costs to rent:
- First month’s rent
- Refundable security deposit
- Renter’s insurance
- Non-refundable security deposit (example: for pets)
- Possible last month’s rent
- Possible pet rent
Consider the Freedoms
As a homeowner you have options. You can rent out your home or part of your home, or take part in the short-term rental sharing economy through Airbnb, VRBO or similar services. You also have the freedom to decorate and remodel your home (within code restrictions) to suit your own taste and lifestyle. And once your house is paid off, you no longer have a mortgage payment.
The long-term security of knowing you own your home is appealing. Homeowners put down roots and become an integral part of the community in which they live. It is easier to make friends in the neighborhood and participate in associations as a homeowner. Since renters are more transient, you don’t see that type of community.
As a renter, you can move on with much less trouble than if you had to sell your home. It may also be easier to qualify for a rental versus qualifying for a mortgage. Although your credit score and credit record are checked for both, requirements are less strict for renters in many cases.
Many rental properties offer amenities included in the rent, like swimming, tennis and fitness, laundry facilities and recreational areas. Some rentals can include part or all of your utilities in the rent. On the other hand, you may not have control over how long you can remain at a property. The landlord may or may not offer the option to renew a lease.
Talk to a Realtor
To explore your home-buying options, talk with a Realtor. A real estate professional can help determine whether buying or renting is your best option at this junction in your life and set you on the road to home ownership.