Does it make more sense to rent than to buy? That has been a long-running debate in this country. However, the question is flawed: There is no right answer.
There may be times in your life when it does make more sense to rent. There will also be times when buying is the financially sound decision. The key is to look at your situation and the housing and rental markets before deciding which option is best for you.
The fact remains, though that the majority of U.S. residents prefer owning. It sounds corny, but owning a home largely remains part of the American dream. According to the November 2018 Home Purchase Sentiment Index conducted by Fannie Mae, 86.2 percent of younger renters think owning a home makes more sense. They cite protection against rent increases and the long-term investment value of a home purchase as important reasons.
The fortunes of the housing and apartment markets are always in flux. One year, the housing market might see rising prices. The next, apartment rents might skyrocket. Before deciding whether it makes more financial sense for you to own or rent, make sure to consider market factors.
For instance, in late 2018, owning a home remains very affordable in historical terms. The National Association of Realtors reported that the median sales price of existing homes stood at $263,900 at the end of the third quarter in 2018. That is a 4.3 percent bump from the prior year. At the same time, mortgage interest rates have continued their moderate rise. The average interest rate on a 30-year fixed-rate mortgage loan stood at under 4.63 percent in late December 2018, according to Mortgage News Daily. The prior year rate was 4.04 percent.
Meanwhile, apartment rents have been rising fairly steadily since 2011. At the end of the third quarter 2018, the US Median Asking Rent was at $1,003.00. That is about a $91 increase from the same prior year period.
The average prices of both owning a home and renting an apartment are key factors to consider. Depending on where they stand, you might be more inclined to lean toward owning or renting.
Pros and cons of renting
When does it make sense to rent? You might be better off renting an apartment when you are just entering the workforce or when you do not have much ready cash.
Renting makes sense for people who are more likely to move in a short period. That is often the case with people who are just starting their careers. You may be assigned a job in a new part of town. You might find a better position in another part of the country. In either case, you want to be able to move in a hurry. If you own a home, you will have to sell it. Selling a home can take months. If you rent, depending on when your lease ends, you can just move.
Renting also makes sense if you do not have much available cash. Most conventional mortgage lenders require a down payment of at least 5 percent of a home's purchase price for those with excellent credit. For a moderately priced house of $200,000, that comes out to a down payment of $10,000. That is a lot of cash to scrape together. It might make sense to rent until you can save that down payment money.
Renting might also be a better option when you have a low credit score. Lenders depend on your three-digit credit score for loan approval and interest rate determinations. If you have a history of missed payments and high credit card debt, your credit score might be low. Lenders reserve their best interest rates for those borrowers who have FICO credit scores of 740 or higher. If yours is far lower than that, you might not qualify for a loan. Moreover, if you do, it will be at a high interest rate. It might make sense, then, to rent until you can boost that score by practicing good financial habits.
Renting also makes sense if you prefer the freedom of not having to do lawn work or home maintenance. When the heat goes out when you are renting, you call your landlord. When it goes out when you own a home, you call a contractor. Then you pay dearly for it.
There are some disadvantages to renting, however. First, you are at the mercy of the landlord, who can steadily raise your rent each year. You will also never know if you rent an apartment directly under the noisiest family in your building. You also often have restrictions on how you can paint and decorate your apartment. You will never build up equity when you continuously rent either.
Pros and cons of owning
Owning a home also comes with its pros and cons.
On the pro side, when you own a home, you build up equity. As you pay down your mortgage loan, you gain access to your home's equity. You can tap into that equity, often at low interest rates, to pay down credit card bills, help cover your children's college costs or fund a home renovation. When it is time to downsize, you can sell your home and take the profits from the sale to buy either a less expensive, smaller house or condo or make a trip around the globe. Owning gives you that financial freedom.
Owning also comes with tax benefits. Each year you can deduct the interest you pay on your mortgage loan. That brings a hefty deduction each tax season. While this is true for most home purchases, the 2017 Tax Cuts and Job Act did change the deduction limits on homes with over $1 million in mortgage debt for homes purchased after December 2017. The previous cap was $750,000.
When you own, you can do with your house what you would like. You can paint your bedroom red, add a third bathroom or convert the space above your garage into a home office. The choice is yours.
Owning, though, is not all positives. You will have to pay, depending on where you live, hefty property taxes. You will also be responsible for any repairs that pop up. With the possibility of leaking roofs, burst pipes, and sinking foundations, you can count on spending money on home repairs just about every year you own your residence. If housing values go down, you might end up owing more on your mortgage loan than what your house is worth.
The decision to buy or rent is a big one. It is essential to look at your own financial and personal situations to make the right choice.
© Fintactix, LLC 2019