Almost every American thinks of owning a home, but timing that home purchase is key as the housing market is highly volatile. Many buyers are unable to decide whether it’s better to rent a house or get a mortgage. This decision depends on various factors including the long-term plans, finances and the real estate market of a particular area.
The U.S homeownership rate has fluctuated from 62% to 70% since the middle of the 20th century. For years the homeownership rate has been in the doldrums. Various demographic and economic factors could be a possible cause of decline. These may include highly populated markets having elevated housing prices, Baby Boomers, and student debt loans preventing young buyers from saving enough so that they could make down payments.
If you’re a renter who’s thinking about buying a home or a homeowner who feels that renting makes more sense, then it’s the right time to evaluate the benefits, evaluative costs and drawbacks of owning versus renting your house.
Upfront, Closing and Recurring costs of Buying a Home
- Down Payment: It’s essential to specify a down payment amount at the time of the purchase offer and if the seller agrees the buyer can change it before closing.
- Earnest Money: Depending on the local market conditions and the seller’s preference earnest money ranges from 1% to 3% of the home’s purchase price. If the buyer accompanies the purchase offer with earnest money than it signifies that he’s serious about the purchase.
- Home Appraisal: Lenders generally require a home appraisal prior to approving the loan which ensures that the offer price matches the actual value of the home.
- Home Inspection: Potential problems or defects might not be apparent to an inexperienced buyer. Hence licensed home inspectors are required.
- First Year’s Home Owners Insurance: The buyer needs to pay the first year’s premium upfront. It can be at the time of purchasing the policy or at the closing. It’s essential because lenders usually require the proof of homeowners insurance before closing.
- Loan Payments: The owner should make monthly principal and interest payments for the life of his mortgage loan which could be between 15 to 30 years.
- Property Taxes: As part of your monthly escrow payment you pay one-twelfth of your annual tax burden each month as property tax.
- Home Owners Insurance: The homeowner insurance premium may vary from year to year depending on your credit score, claim history, and change in your home appraisal value and your policy’s deductible and coverage amounts.
There could be few special or on time cost during the purchase of a house including furnishing, moving costs, repairs, improvements and renovation projects.
Advantages of Buying a Home
- Equity is Built Over Time: In almost all mortgages a portion of the monthly payment goes towards the loan’s interest and the remainder pays down the principal. Every dollar that is put towards the loan principal represents a dollar of equity which signifies the actual ownership of the property.
- Tax Benefits: Owner-occupied homes are exempted from a portion of property tax burden by some states, and this tax may accrue normally. Those who itemize their federal income tax can deduct the property tax an High Upfront Costs: It’s possible to sell out no less than 5.5% of the home value before entering the house. Upfront home buying costs depend upon the value of the home and the size of the down payment.d the interest paid on a mortgage. Hence the overall tax burden is reduced.
- The Potential for Rental Income: Your house can be turned into a source of income. The mortgage, tax and insurance payments on your house can be partially or totally offset.
Disadvantages of Buying a Home
- Potential for Financial Loss: You risk a financial loss when you sell your house during your tenure if the home value decreases or remain flat.
- Responsibilities for Maintenance and Repair: The cost of all uninsured maintenance and repair work is the responsibility of the homeowner. The exact outlay varies from one year to the next. In fact, 1% of the home value needs to be paid towards these expenses.
- High Upfront Costs: It’s possible to sell out no less than 5.5% of the home value before entering the house. Upfront home buying costs depend upon the value of the home and the size of the down payment.
Upfront and Recurring Costs of Renting a House
- Security Deposit: Security deposit is required to ensure delinquent rent, property damage requiring repair, and other incidentals.
- First Month’s Rent: Mostly landlords require the first month’s rent upfront. There are fewer chances that the tenant moves in the middle of the month.
- Non Refundable Deposits: Apart from security deposits there are some nonrefundable deposits which depend on the rental property laws of that particular state and your living situation.
- Monthly Rent: Your rent might increase whenever you sign a new lease. Rent payments are based on the number of occupants and local market conditions.
- Pet Rent: Over the tenant’s entire stay pet rent spreads the expected cost of pet-related wear and tear.
- Renters Insurance: Although there’s no need of carrying a renter’s insurance it could be a protection against loss due to fire, theft or other perils.
Advantages of Renting
- No Responsibility for Maintenance or Repairs: Since you are a renter you are not responsible for home maintenance or repair costs. For any initial problem, you merely just call the landlord.
- Relocating is Easier: Renters who change jobs often rent a house until their professional lives stabilize. While renting a house relocating to work becomes more accessible, less costly and less time-consuming.
Disadvantages of Renting
No Federal Tax Benefits: Renters are not eligible for house related federal tax credits or deduction a as compared to the owners who can deduct property taxes and mortgage interest on their federal income tax returns. There are other disadvantages like limited housing security and limited control over ongoing housing costs.
It may vary from person to person whether he/she should buy or rent a house but there are advantages and disadvantages of both.