Owning your own home has long been sold as the American dream. Of course, the ones selling that dream have often been lenders, home builders, and governments who often stand to benefit when you buy a house in the first place. The purpose of this article is not to make a case for either or, but rather to illustrate all the costs associated with each so as to (hopefully) better inform you, the consumer, in your decision making process.
Renting a House
- Cost: Rent is generally much cheaper in more expensive markets than the cost of a mortgage, taxes, and insurance (PITI).
- Maintenance: Maintenance is provided by a third party. (If your roof needs to be replaced you’re not on the hook for the bill. )
- Time: Less of your time is consumed with the property since the owner is generally responsible for repairs and upkeep.
- Rates: Rent rises over time and is an inflation hedge (i.e. you do not have fixed costs).
- Value: Any appreciation in the property does not belong to you.
- Ownership: You will never own the property unless you choose to buy it from the owner.
Owning a House
- Forced savings: Monthly principal pay down is another form of savings rather than just sticking money in the bank.
- Stability: Owning a house (although trends have been changing in recent years) means you are putting roots down in a neighborhood.
- Appreciation: Depending on the length of time you live there, the home may increase in value substantially netting you a nice profit when you sell.
- Taxes: The interest you pay on your mortgage is deductible (to the extent of your tax quintile) as are your property taxes.
- Flexible Cash: Your capital is tied up in a house is considered to be illiquid. That is, you can cannot free it up easily.
- Capital expenses: You are responsible for minor and major repairs to the house while you own it.
- Less freedom: If your job or living circumstances change you can not generally walk away from a house with a mortgage like you can a rental when your lease is up.
- Market fluctuations: Your house can lose a substantial portion of its value through no fault of your own due to market conditions. This can cause you to lose large sums of money should you sell.
- Sales costs: Conservatively it costs around 8% of the sales price to sell a home. This includes realtor commissions, title/closing costs, and loan fees/points paid for by the seller. If your home hasn’t appreciated by much more than you paid for it, you could be bringing a check to the closing table.
The decision to rent vs. own is a personal one, and it’s driven by many different internal and external factors. Probably the best way to examine what makes sense for you is too look at your market’s median rent price and compare it to the median home sales price. Once you know the home price you can quickly run scenarios using different down payments and interest rates to see what your potential mortgage amount might be in comparison to renting. If it’s less or even close, it probably makes sense to buy, all else being equal.
Hopefully, this has shed some additional light on your thought process, and if you have any questions please feel free to contact us.