Buying a home easily qualifies as one of the largest decisions a first-time buyer can make in his/her lifetime. It is a financial commitment that requires advance planning, consideration of life direction and associated goals. Consideration of additional financial goals is also important (in addition to making payments on a home loan – building equity versus having available cash flow). Here are a few factors to consider.
Both owning and renting have possible advantages. Rents could potentially increase each year or each contract renewal period. A fixed rate mortgage will be a fixed monthly amount for 30 years or 15 years (depending on the length of the mortgage loan period). You know what you will be paying. Even with an adjustable rate mortgage, there is a range within which the payment will stay for the life of the mortgage. There is no certainty what the monthly rent payment will be fifteen or thirty years from now.
The rent paid is used to pay the owner’s mortgage on the property and create an ongoing source of cash flow for the landlord, not to mention tax write-offs and deductions. The renter gets no such advantages/benefits and has nothing but rent check receipts to show at the end of the contract period.
Rents are often less than mortgage payments, providing more leftover cash each month. The additional cash could allow contributions toward other savings goals: retirement, college, travel, investments, down payment towards a future home, etc.
Renting makes it easier to relocate, especially when pursuing job/career opportunities.
Quality of life is also an issue: renters are limited in what they can do to the property in terms of appearance and improvements. Landlords are reluctant to make many of those aesthetic changes since additional expenses cut into their profit margin and cash flow. Homeowners can create their environment to their own tastes and receive the benefit of the property improvements. Household repairs – plumbing, electricity, etc – are the responsibility of the landlord when renting or the homeowner.
Apartments are smaller, reflecting the goal of maximizing the number of income-producing properties. Stepping up to condominium/townhouse ownership often means larger rooms, in-unit laundry areas, enclosed parking and more storage space. Stepping up to single-family home ownership often means more space, a yard and higher utility bills. Ownership provides an opportunity to personalize that space to accommodate personal taste and lifestyle.
A savings account
The house payments are applied to both principal and interest with the bulk of the earlier payments offsetting interest more than principal; the later payments have a larger portion applied to the principal balance. Over time, the property will appreciate, creating additional value (equity) in the property. Equity is the difference between the outstanding balance of the mortgage loan(s) and the market value of the home. Both are a way to accumulate “savings.”
Owning a home is often considered a good investment. As a general rule, over a long term, homes will appreciate about four to five percent per year; this can vary by neighborhood, region, national and local economy, etc.
So, for example, on a $200,000 home with a 20 percent down payment, the investment would be $40,000. Appreciating at five percent, the house would increase $10,000 in value that first year; the $10,000 appreciation on a $40,000 investment yields a 25 percent return-on-investment (ROI).
The interest on the mortgage payments and property taxes are both tax deductible from gross income reducing taxable income, essentially meaning the government is subsidizing the home purchase. The effective rate of return is comparable to or better than many other investments. Prospective homeowners should check with their tax/financial advisers for their specific situation.
In some higher-priced markets, the costs of owning a home – property taxes, repairs, real estate agents’ fees, and mortgage interest – may outweigh financial benefits (including tax breaks). It’s important to do the math. There are online calculators (Bank of America, New York Times, and many others). Individual neighborhoods can have their own unique dynamics in the for-sale and for-rent sectors.
Owning a home may be a good idea if you want to put a large portion of your monthly living expenses toward an investment you could eventually pay off and own. It makes sense if you want to stay in an area and prefer to create a home that reflects your personal tastes. Renting may make more sense in areas where home prices are high relative to rents and if you have other financial goals that need funding or you need the flexibility to relocate. Only the prospective buyer can make that decision.
Seek out the advice of experienced real estate professionals who know the neighborhoods you are interested in; they can refer you to other quality professionals (loans, insurance, inspectors, repairs, etc.) and help you every step of the way.