Buy or Rent a Home?
To buy or rent a home -- that is a question that many adults face more than once in their lifetime. It's a significant decision that requires a lot of thought. It's not just about how much you can afford. After all, you don't always need to get a personal loan to buy a property. In today's market, you can easily find cheap homes for sale.
On the other hand, there are a lot of companies that provide personal loans without a bank account. But a good deal isn't the only consideration when you're thinking of buying a house or renting one. If you're stuck debating between becoming a homeowner or a renter, you've come to the right place. In this article, we'll delve into the main differences between the two, as well as the costs of both. We'll also enumerate the various benefits and drawbacks of renting and owning a home. This way, you'll be able to judge which choice is more favorable for you.
Costs of Homeownership
There are costs to both renting and buying a home. Some are upfront costs; others are recurring. Let's talk about some of the charges you'll be facing when you choose to purchase a property.
Upfront & Closing Costs
- Earnest money deposit
To show that your offer is genuine, you may give the seller an earnest money deposit, which is usually 1% to 3% of the asking price. It serves as an incentive for the seller to accept the offer and take the property off the market.
- Down payment
This is the percentage of the purchase price that you pay upfront upon closing the deal. This amount will vary depending on market conditions, your credit profile, etc. The rest of the purchase price will be paid for by your mortgage lender. The lender will typically be the one who will set the amount for the down payment. The minimum is 3% of the purchase price. However, real estate agents recommend that buyers pay 20% because it eliminates the need to pay for mortgage insurance, which can be pricey (up to $1,000 per year).
- Property Taxes
Estate taxes are paid upfront, not in monthly increments. That means that the seller will probably have already paid his or her property taxes. When you buy a house, you're obligated to pay back the amount the seller paid for the period between the day you closed the deal up to the end of the current tax period.
- Homeowner's insurance
Before you can close the deal, the lender will require you to pay the insurance premium for the first year upfront. The cost of this will vary greatly depending on various factors, including your credit score, the coverage, and the deductible.
- Other closing costs
There are plenty of fees you'll need to cover when you're closing the deal. These include owner's title insurance, flood certification fee, state and local transfer taxes, recording taxes, the loan origination charges, the mortgage interest for the first month, and the closing fee. Generally, the total closing cost ranges from 2% to 4% of the home's purchase price.
Recurring Costs
There are many recurring costs once you become a homeowner. You will need to pay your property taxes, homeowner's insurance, and private mortgage insurance every month. The same goes for your loan payments. But as a homeowner, you will also now be responsible for paying all the utilities and services in your home. These include gas, electricity, water, garbage, cable, Internet, etc.
Maintaining your home is another recurring cost. Over time, you'll need to fix or replace broken or worn-out fixtures and appliances. You may need to refresh the paint and finish inside as well as outside your home. You may even be required to do significant repairs at some point. Of course, you can quickly get one or two personal loans for home improvement to cover the cost. Plus, home improvement and renovation projects may boost the value of your home. But it's still a cost you will have to pay for on your own. There's no landlord to do it for you.
Costs of Renting
While renting a home won't be as costly as buying one, that doesn't mean you won't encounter any expenses before and after moving into your new home. Even if you find cheap homes to rent, you'll still be paying most, if not all, of the costs listed below.
Upfront Costs
- Security deposit
All landlords will require a security deposit, which will be used as "insurance" against property damage, late rental payments, and broken leases. Usually, the maximum amount for a security deposit is 1.5 times the monthly rent.
- First month's rent
Aside from a security deposit, most landlords will ask you to pay for the first month upfront. For renters who move in the middle of the month, the landlord may only require a prorated amount.
- Nonrefundable deposits
Rental property laws differ from state to state. The same can be said for landlords. Some may require you to pay an additional deposit aside from your security deposit. This nonrefundable deposit serves as a surcharge or fee on top of your initial "down payment." There are several different types of nonrefundable deposits. One of the most common is the last month's rent. Some landlords will require you to pay rent for the previous month of your rental term. This amount won't be refunded; instead, it will be used to cover the last month of your tenancy. Another type of nonrefundable deposit is the pet deposit, which can range from $100 to $500.
Recurring Costs
Similar to a homeowner, you will also have recurring costs to deal with should you choose to rent a home. There's the monthly rent. Some landlords may charge a pet rent instead of a pet deposit. Renter's insurance is another monthly expense. While it's not required, it's highly recommended as it protects you against loss due to burglary, fire, etc. As for utilities, this will vary based on where you live and your landlord. Some apartment buildings include the services in the monthly rent, while others will require their renters to cover most, if not all, of the services.
Rent vs. Buy: Advantages
Advantages of Homeownership
- You get to build equity over time.
- You get several tax benefits such as federal tax deductions (i.e., write off their mortgage interest payments) and homestead exemption. These benefits are not available to you if you rent a home.
- You get more creative freedom in decorating your home.
- You get more stability. No one can evict you from your home unless you fail to pay your monthly mortgage payments.
- You can turn your home into a potential source of income in the future by renting part or all of your property.
Advantages of Renting
- You are not responsible for maintenance and repairs.
- It's easier for you to relocate since you're not tied down to your property.
- The fluctuating value of your home due to changes in economic conditions is none of your concern; it's your landlord's problem.
- Lower upfront costs.
- You don't have to pay property taxes.
- Credit requirements are not as strict because you won't be required to obtain a mortgage. Mortgage lenders tend to have higher credit standards, viewing borrowers with a credit score of below 700 as subprime.
Rent vs. Buy: Disadvantages
Disadvantages of Homeownership
- High upfront costs.
- You are responsible for maintenance and repairs.
- You may need to furnish your home.
- Your home is affected by real estate market conditions. The value of your home may increase or decrease during your tenure as a homeowner. There's a potential for financial loss when you own property.
Disadvantages of Renting
Unless you choose to rent with an option to buy, all the money you pay for rent does not build equity. No matter how long you've been a renter or how well you've taken care of the rental property, you don't have equity in the property.
- There are no federal tax benefits.
- You have limited control over the cost of the rent. With the exception of municipalities with rent control laws, landlords can quickly raise the rent as soon as the current lease expires.
- You have limited housing security. While you can't be evicted without adequate notice from your landlord, there's no guarantee that you can stay in your rental property indefinitely without the landlord's consent.
- Your choices of home are limited to where there are vacancies.
So, Should I Buy or Rent?
The choice of which is better is really up to you. It's not just the financial factors that you'll need to consider. You'll also need to evaluate subjective, non-financial factors such as career, housing needs of your family, stability, lifestyle, etc. Only you and your family can make this decision. The only thing we recommend is to think everything through twice before leaping. It's better to wait than to rush into something that you may end up regretting.
