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What are the advantages of buying and renting a home?

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There are plenty of factors to consider when making the decision to rent or buy your next home. The real estate market is always evolving, and what may have been the best decision for your financial situation in the past might not still apply to you now. As you consider renting or buying a home, know that varying rules, regulations, locations and markets can all play a part in how much you end up paying.

Separating some common myths from reality is a good way to start. For example, just because you hear that it’s a “buyer’s market” doesn’t mean you should necessarily buy now. Sometimes, renting is the most sensible financial option. It all depends on your priorities and financial situation. So let’s take a deeper look at the pros and cons of both renting and buying a home:

Icon - House Benefits of homeownership

One of the biggest advantages of owning is the equity that you can build in your home. Equity is the difference between what you owe on your mortgage and what your home is currently worth. Over time as you make your mortgage payments, the total amount that you owe on your home goes down, while the value of your home (theoretically) could go up. This increased value could give you the ability to build wealth, affording you greater financial freedom down the line, if you ever decide to sell.

There are also potential tax benefits to home ownership. As a homeowner you might be able to take advantage of certain deductions like the mortgage interest deduction and property tax deductions that can save you a lot of money.*

When you own your own home, you can customize and improve it in a ways you cannot do with a rental property, so home ownership offers a more flexible living situation. With a fixed rate mortgage, you’ll have the stability and peace of mind of knowing what your payment will be. You won’t have to worry about your rent changing from month to month at the whims of your landlord or competitive rental markets.

Disadvantages icon Disadvantages of homeownership

While there are many benefits, there are also a lot of costs associated with buying and owning a home. Some of these costs are obvious and up front. Others are less obvious and may arise much later.

For example, the down payment isn’t the only sum of money you are accountable for at purchase. There are also closing costs and home inspection fees. After these up-front payments, you’ll also incur monthly expenses—like your principal and interest, property taxes, homeowner’s insurance, mortgage insurance (if your down payment is less than 20% of the home’s purchase price), HOA dues (if applicable) and other utility bills.

In addition to those recurring payments, you’ll be responsible for any repairs or renovations—both planned and unforeseen—and general maintenance. Gone are the days of having the landlord send a repair person to fix something. That means a single bad weather event, a broken pipe or a failing appliance could cost you a lot of time and money without warning. Here are some common homeowner expenses:

  • Property taxes
  • Utilities (some landlords require renters to pay these)
    • Trash
    • Water/sewer
    • Electricity
    • Gas
  • Pest control
  • Yard care
  • Homeowners insurance
  • Lender-required flood insurance or earthquake insurance (in some areas)
  • Home Owners Association (HOA) dues
  • Leaf or snow removal
  • Security system
  • Internet/cable

Icon - House Benefits of renting

As a renter, you don’t have to worry about the costs of maintenance or unexpected repairs. Typically, you’ll make one monthly rent payment and pay some utility bills. If there’s a leaky faucet or malfunctioning appliance, your landlord pays the bill. This can save you some money, especially if you don’t want to settle in place for a long time.

Renting makes it easier to relocate, so if you see moving as a possibility within the next few years, renting could make more financial sense. The financial advantages of buying a home grow after you stay in your home for a while, giving yourself time to build equity and value. If you foresee yourself moving in the next few years—for love, a new job, better weather, or any other reason—the flexibility of renting may be a better option for you at this time.

Disadvantages icon Disadvantages of renting

Renting does come with downsides, especially if you’re fed up with an annoying roommate or you’re dreaming of a do-it-yourself project that your landlord won’t allow. Yes, you can pick up and move with more ease, but some desirable destinations could end up with higher rent costs than what you would pay on a mortgage.

If you have a growing family with needs for more space, renting may not offer the stability you desire. Different landlords may have different rules, and extra fees, when it comes to pets and children. And not all landlords will be receptive to the little alterations you’d like to make in order for your home to feel more like you.

Here are some common expenses when renting:

  • Down payment
  • Renters insurance
  • Utilities (either rolled into the monthly costs or paid separately)
  • Fees for pets
  • Parking expenses
  • Laundry
  • Internet/cable

Whatever you decide, First Tech is here to help, from saving for your goals to navigating the home buying process. Get in touch with an expert from First Tech today to discuss your options.

Question mark Frequently asked questions

Should I rent or buy?

Financially, transaction costs for buying a home tend to be higher than renting so if you’re planning to move in the near future it may not make sense to buy. Sometimes when people are new to the area they will rent first while they explore the city and determine where they’d most like to buy a home. Ultimately the right answer depends on your situation. Both have pros and cons, and the right choice for you will depend on several variables and your preferences. 

Does renting or buying cost more?

The answer depends on so many factors. But if you believe the value of homes and monthly rents will increase steadily over time, then buying may be cheaper over a long time horizon. Renting doesn’t allow you to build equity so those monthly payments are like a pay-as-you go plan. Buying a home tends to be more costly upfront, although a home with major issues can surprise you with big expenses for years.

Is a home a good investment?

Maybe. Over long periods of time, homes tend to increase in value. But money used to buy and maintain a home is money that can’t be invested in other ways, potentially providing a greater return over the same time period. Those alternative investments could be anything so they certainly aren’t guaranteed to increase in value. A home is first and foremost, shelter. Ideally, it increases in value as it provides shelter but that shouldn’t be expected.

How much are property taxes?

Real estate tax rates vary widely from state to state, from less than a half of one percent to more than two percent. That may not seem like much but on a $500,000 home you could pay more than $12,000 in property taxes annually. Often, homeowners have these taxes rolled into their monthly payments to avoid a large single bill each year. Past property taxes payment amounts on existing homes is public information and can be found on popular home buying websites or county websites, generally under Assessment and Taxation.

How much is Private Mortgage Insurance (PMI)?

If you put down less than 20% and get a conventional loan, PMI will typically cost about 0.5% - 1% of the loan amount per year. So on a $300,000 loan you’re looking at a cost of $1,500 - $3,000 annually.

How much is homeowners insurance?

Expect to pay $700 - $2,000 a year for homeowners insurance. Costs can vary greatly depending on where you live, claim history and the characteristics of the home. In some states, insurance companies use what’s called an “Insurance score” to calculate your rate. This methodology may take your credit history into account. Other factors may include owning a dog, having a pool or trampoline and more.

*First Tech Federal Credit Union does not provide tax or legal advice. This content is offered for informational purposes only, and is not intended to provide, and should not be relied on for tax or legal advice. You should consult your own tax and legal advisors before engaging in any transaction.