No matter your age, the prospect of purchasing a home is a major life decision.
For many, owning a house is the iconic American Dream. For those people, it’s not a matter of whether to purchase a home but when.
Others may not have the financial luxury or even interest to become a homeowner.
Gathering the funds for a down payment can be prohibitive; and for those who travel often for work, the responsibility of homeownership can be too much.
In any case, there are practical considerations before you sign your name on a purchase or rental agreement.
Financial Considerations
Getting started: Many people assume that renting a home is cheaper than buying. That’s not always the case. There are many programs where qualified home buyers can put down a nominal down payment on a home purchase — three percent in some cases — making ownership attainable for a much larger pool of candidates. Even still, three percent of $200,000 is still $6,000 … your personal circumstances may take this out of consideration. Plus, when you purchase a home, in addition to down payment money, there are also closing costs, which can reach several thousand dollars, as well as homeowners insurance.
Maintenance: Additionally, even if you have the funds for purchasing a home, there are ongoing expenses as a homeowner — for instance, you’re responsible for maintaining your home, whereas, in a rental situation, the landlord typically pays for repair costs. As such, renting provides you with far more predictable monthly costs — your rent and utilities, for instance.
Rising prices: Homeowners with a fixed mortgage have a predictable monthly mortgage payment — it remains the same for the duration of your mortgage (unless you refinance or you have an adjustable mortgage). On the other hand, when you rent a house, your rent can increase each year.
Equity: As a homeowner, you build equity over time, which you can borrow from or profit off of when you go to sell your house. On the other hand, if you rent a house, there is no equity accumulating in your monthly rent payments. Once you move, you start over at your next house, with no accumulated equity to your balance sheet.
On the other hand, as a homeowner, home values can decrease, which means if you go to sell your house, you can lose money.
Duration: When it comes down to financial considerations, decide how long you think you might live in your home. If it’s five years or more, purchasing a home could be the more affordable option than renting. However, if it’s less than five years, by the time you factor in a down payment, closing costs, and the prospect of home values decreasing, renting may be the more practical financial option.
Lifestyle
Flexibility: If you rent your house, you have increased flexibility in moving. Homeowners cannot do this as easily, as selling a house is time-consuming and expensive. Plus, if your home value has decreased, you may not be able to afford to sell and move.
Additionally, as a renter, you can familiarize yourself with a neighborhood before you buy, making a prospective purchasing decision far more certain.
Security: When you own your home, there is security knowing that you have a place that is yours — you control your living space and environment.
If you rent a house, your landlord can sell your house and force you to leave when your lease is up, leaving you with a limited sense of security.
It’s important to consider whether having the flexibility to move is more important to you than establishing a permanent home. If the former, then renting makes more sense.
However, if you’re intent on settling down in the same home, then purchasing a home may be more practical.
Whichever option you choose, you may find it helpful to consult a financial professional, who can help you sort through your unique financial situation and the tax implications of renting or buying.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
This material was prepared by LPL Financial, LLC.
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