(article via the truth about mortgage)
This is certainly an intimidating question, and one that’s difficult to sum up in one post, but I’ll do my best to cover as many pros and cons for each as possible (feel free to add more in the comments section!).
These days, home prices are well off their recent (ridiculous) highs and mortgage rates continue to break new record lows, which is surely making many renters salivate at the notion of homeownership.
After all, if you can buy a home for $100,000 less than your future neighbor while also snagging a mortgage rate several percentage points better than theirs, you’d be in pretty good shape, right?
That’s the hope, barring a complete implosion on the economic and housing front.
But nothing is ever that easy, is it? With homeownership comes responsibility, while renting may be relatively carefree.
Pros Of Renting
Let’s start with the beauty of renting an apartment or a home. When you rent, you pay a landlord a certain dollar amount each month.
Put simply, this dollar amount is typically less than the going cost of a mortgage, assuming you factor in the insurance and taxes. Oh, and the maintenance.
Sure, a mortgage may appear cheaper, but guess what happens when your toilet breaks? You can’t call your helpful resident plumber and get a free fix.
You’ll either have to get down with some DIY or open your checkbook. So renting, while seemingly the same price or even more expensive than owning, might still wind up cheaper.
There’s also a huge psychological freedom to renting. You aren’t locked in for 30 years. At most, you probably have a 12-month lease agreement. And there’s even a good chance you’ve got a month-to-month deal in place.
In short, you won’t feel trapped, and you can freely move on if you want/need to for any reason, such as job relocation, downsizing, upsizing, etc.
This should make it a lot easier to sleep at night.
Cons Of Renting
On the other side of the coin, renting seems to be synonymous with temporary. If you want to establish a household, renting an apartment or a home might not be the best way of going about it.
You might also be limited to what you can do to the unit. Pets aren’t allowed? You can’t paint the place? You can’t do X, Y, or Z?
Oh, and those rent payments never stop – sure, 30 years is a long, long time, but your lifetime will probably be longer.
There won’t be any relief in retirement when you rent – you’ll keep paying your landlord for “as long as it takes.”
And at the end, you won’t have anything to say for it, no home equity or ownership, despite all those payments. Nothing to hand off to your kids or to sell for cash proceeds.
Additionally, your rent can and will most likely rise, even if some level of rent control is in place.
So you might be paying less than your neighbor with the mortgage today, but if your neighbor’s mortgage is fixed, they’ll still be paying the same amount in the future while your rent shoots higher.
Pros Of Buying
Okay, so we’ve discussed some pros and cons of renting, but what about buying?
Well, the obvious advantage is that you actually gain home equity, or ownership in your home.
In other words, over time the home or condo actually becomes your property, as opposed to renting, where you never own anything aside from the measly contents.
Additionally, owning might be a cheaper alternative than renting these days in many markets across the United States thanks to the low interest rates on hand.
Do a simple online search and you’ll find plenty of places where it’s “better to buy than rent.”
In many cases, your mortgage payment, even when factoring in taxes and insurance, may be less than what a landlord charges for rent.
Why pay $2,500 in rent if you can make a $2,200 mortgage payment, especially if you can write off the interest and the taxes?
That’s right, with homeownership comes tax benefits. Of course, the future of the mortgage interest deduction hangs in the balance, but real estate taxes are still fully deductible.
Factor in the tax savings and your mortgage payment gets even cheaper compared to a rental payment.
An owner of property also has fewer restrictions, and can add or modify to their heart’s content, less any government bureaucracy.
This means you can make your property worth even more over the years, or simply make it more useful/attractive for you and your family.
Cons Of Buying
There are plenty of disadvantages to owning property as well. First off, you must come up with a sizable amount of money, either for down payment or to buy outright.
With rent, typically you just need the first and last month’s payment. When buying, you’ll need at least 3.5% of the purchase price in most cases (FHA loans), which can be a hefty amount in higher-priced areas of the nation.
There’s also a good chance your mortgage payment will exceed the rents in your area. This can certainly vary, but don’t be surprised if it comes at a premium.
You also have to pay real estate taxes and insurance, which don’t stop once the mortgage is paid off. You may even need to pay costly HOA dues.
Factor that all in and you could still be paying thousands each month to live “rent-free.” That doesn’t sound very free, does it?
You also become the landlord when you own. Remember that helpful handyman at your old apartment complex that fixed your leaky faucet with a smile? That’s your responsibility now Bob Vila.
Oh, and you better believe that every little thing that’s wrong with YOUR property will give you stress, each and every day.
You can’t just pack up and move along with ease. It takes time (and money) to unload a property, and you might not make out as much as you think once you factor in real estate commissions and less-than-anticipated home price gains.
Heck, your house might even lose value and you could be foreclosed on if you don’t hold up your end of the bargain.
In Summary
As you can see, there are plenty of pros and cons to buying vs. renting, and vice versa.
When you rent, you pretty much know what you’re getting into. You’re not going to make any money, but you’re not going to explicitly lose any either. And it’s mostly a hands-off type of deal.
With a home, you’re making a bit of a gamble on your future, and the future of the economy. After all, you need to put a certain amount down, and you need to ensure you keep making money so you can keep up with your mortgage payments.
You’ve also got to set aside an emergency fund so you’re able to pay for repairs if and when necessary.
But ideally, the tradeoff is that you’ll be rewarded for making that homeownership leap of faith.
Below, I’ve added a fairly exhaustive list of pros and cons for those pondering the rent vs. buy question:
Rent Advantages
- May be cheaper than a mortgage payment
- Fewer (if any) maintenance costs
- No down payment required (less deposit)
- No real estate taxes (renters insurance optional)
- Less stress (who cares, it’s not yours!)
- Freedom to move or downsize when necessary
- No risk of home price depreciation
- Some utility bills may be included
- “Free” amenities such as pool, gym, security
- Money can be used for other, more profitable investments
- Can’t be foreclosed on
Rent Disadvantages
- Rental payment may exceed monthly cost of mortgage
- No ownership or wealth creation
- Payments never stop when renting
- Rent will rise over time
- Must deal with a landlord or management company
- No tax benefits
- Rules, regulations, and limitations
- More temporary, less stability
- Always at the mercy of the property owner
Ownership Advantages
- You can build home equity and wealth
- Sizable tax deductions possible
- Your space, your rules (pets welcome)
- Ability to remodel, expand, tear down
- Pride of ownership (social status, accomplishment)
- Potentially better for children, family structure
- Mortgage can improve your credit history/score
- Ability to borrow against your home (HELOC or cash-out)
- No more monthly payments once mortgage paid off
- Fixed payments (if you choose a fixed mortgage)
- Mortgages are the cheapest loans available
- No landlord
- Can exclude capital gains when you sell (partially)
- Inflation hedge
- Can rent out to others
- Can sell and use proceeds for bigger/better home
- Retirement nest egg
- It’s the American Dream!
Ownership Disadvantages
- Home prices may lose value
- Could overpay for your property
- Obtaining a mortgage (and finding a home) is a hassle
- Not everyone qualifies for a mortgage
- You must pay taxes and homeowners insurance
- Total housing payment can be more expensive
- Mortgage payment can rise (if an ARM)
- Sizable down payment necessary
- Maintenance costs can be excessive
- Pricey HOA dues (if applicable)
- You’re “stuck” in a home (long-term commitment)
- Increased liability and responsibility
- Transactional costs of buying and selling
- Ownership is stressful!
- Taxes and insurance generally rise
- Your home can be damaged or destroyed (and not fully insured)
- Can be foreclosed on and lose your home
