There was a time in the not too distant past when we all thought that owning a home was the key to getting ahead in life and being financially secure. Everyone from young couples to driven singles were saving money and taking on risky mortgages in order to own a piece of property. We thought that this was the best way to build wealth because we owned our home, rather than wasting money on rent, which meant we could sell that home at a profit at some point in the future.
As we all know, that has not turned out to be true. Many people found themselves trapped in their homes when the economy crashed. Homes were not selling and those questionable mortgages rapidly skyrocketed beyond the value of the home. It really was an economic disaster of global proportions. Now that things are turning around many people still believe that home ownership is the way to getting ahead in life, but that is only somewhat true.
Why Renting Is Better
The first thing you have to do when you think about renting a home is get rid of the idea that you are throwing your money away. Even though you are not building up equity that you will earn back you are not simply throwing money into the trash. Instead, you are exchanging money for a place to live. You would never think of buying food or paying the electric bill as throwing money away because they are basic necessities, spending money on a place to live is the same thing. This is especially true if you do not plan to be in the house or apartment for a long period of time. The general rule is that you need to live in a place for at least five years in order to be able to sell it and break even or make a profit. If you move around a lot for work or simply by choice then renting is your smartest financial decision.
The second reason renting is better is that it is usually less expensive. When you purchase a home you have a big initial investment for the down payment and any other closing costs. If you do not have that money you might be able to find a lender willing to loan you the full amount, but odds are it will not be the best financial choice. The problem many people found themselves in during the recent economic crisis is that they had purchased homes with no money down. Once the lender tacked on interest their actual loan was more than the value of their home. While that would have been OK if the shortfall was small, many mortgages were tens if not hundreds of thousands of dollars over the value of the house. If you have not saved up for the down payment of a home then you are better off renting until you do.
The start up costs are not the only extra expense of owning a home. As a renter if your water heater breaks or your sink is leaking you simply phone the property manager and they send out someone to fix it on their dime. While you pay for it indirectly with your rent, it is still a fixed expense that you can budget for each month. When you own a home whenever something goes wrong the cost to repair it comes out of your pocket. Too often people become what is referred to as ‘house poor’ meaning they can afford their mortgage and not much else. When you buy a home you have to be able to pay for the mortgage each month and any potential repairs, including big expenses like broken furnaces and leaking roofs. If you cannot do that, then sticking with renting is a better choice.
Why Buying Is Better
As you would expect, buying is better because of the investment aspect. If you save up money for the down payment and get a good house and a solid mortgage you could wind up making a few dollars when it is time to sell the house. If you have the money to spend on a house it is often the best investment you can make because the return on it can be quite high. Not only are you making a great investment but you also have a place to live, killing two birds with one stone.
There are tax incentives for home ownership. The government wants people to own homes, as such they are willing to give tax breaks to home owners based on the interest they are paying on their home. Each year you will be able to deduct some or all of the money you have spent on interest when you do your taxes. This is especially important during the first few years you have a mortgage because this is when you pay back the largest chunk of interest. However, try not to depend too much on any tax break as laws change regularly so the break you get one year may be significantly less of non existent next year.
Buying is usually a better choice if you are going to live in a home for a long period of time. As we noted before if you will live in a house for more than five years you will probably be able to recoup your initial investment and sell the house for a profit. However, before you run off and find a realtor because you plan to live somewhere for the next several years make sure you meet the other criteria too like having the down payment cash and being able to afford repairs.
The choice between renting or buying a home is a very personal one. Only you can decide what is right for you and for your finances. Always keep in the back of your mind that there is nothing wrong with renting and that it is not a waste of money until you are financially ready to take on home ownership. Don’t let anyone influence you into buying a home and taking on a big mortgage until you are ready to do so.
This article was written by Timothy Ng. You can read more of his work at Credit Card Finder, where he has a number of comprehensive guides to all types of credit cards.