If you’re a career-oriented person who likes saving money, there will be a point in your life when you’ll wonder if it still makes sense to rent your home, or if it’s time to buy.
It used to be that renting generally meant living in an apartment, and buying was limited to owning an actual house. That hasn’t been the case for a long time, though. These days, people rent and purchase both—though an apartment you own is generally called a condo.
Consider the following when deciding whether you want to buy a home or keep renting.
It’s not easy to predict where the housing market will go, but we can look at charts to see where they’ve been. From about 1970 until 1998, housing values climbed steadily. From 1998 until 2006, they saw a sharp increase, then, over the next six years, a crash. Many homes valued at about $240,000 in 2006 were worth just $175,000 in 2012.
So, for years, buying a house was a great investment, but when prices crash, owners end up stuck. When you owe more on a home than it’s worth, that’s called being upside down in equity, and you’ll lose money if you sell your home at that time. Chances are the value will increase again, but it will take years.
Ideally, as a homeowner, you want the value of your place to keep increasing, but you should be prepared for the possibility of a housing slump. It’s smartest to purchase a home somewhere you want to live for a long time. More on this later.
As mentioned in the opening of this article, the time to consider buying a house is when you have enough money in savings. Buying a home takes a down payment, and the more you can put down, the better. You’ll owe less, which will lower your mortgage payments significantly. You’ll also need good credit or lenders won’t want to work with you.
Renting, on the other hand, doesn’t require as much in savings. You’ll need enough for a rental deposit and enough to move, including renting a truck and possibly a self storage unit. Also, while many companies won’t rent to people with low credit scores, others only want to know that you pay your rent on time, and will ask for a slightly higher deposit.
When you purchase, however, you’re protected from rent increases. It’s common for renters to see the cost of living in the same place go up, sometimes every year. Homeowners, however, only see mortgage increases if they refinance (and this can even lead to decreases).
Alas, the price of rent is not deductible from one’s taxes. (The exception is if the renter uses one lockable room as an office for work, in which case part of the rent can be deducted.) So as a renter, your money goes to your landlord, and then you never see it again.
In the early years of paying a mortgage, most of the money will go to interest, and homeowners can deduct the interest from their taxes. It helps to understand what that means, though. It doesn’t mean they pay that much less in taxes. Here is a simplified example of what it does mean. If you pay $10,000 per year in interest on your home mortgage, you can put that amount as a line deduction on the proper tax form. Now, if your tax rate is 30%, that’s how much you won’t have to pay out of the $10,000, which means you’ll save $3,000.
Homeowners do, however, have other tax obligations, such as property taxes and homeowner’s insurance. The amount can vary from state to state.
Keep in mind as well that, while renters don’t have to buy renter’s insurance, it is a good idea to have it.
Where the Money Goes
Above, I said that once you pay your rent money, it’s gone and you don’t see it again. That’s not completely true. Most of the time, some utilities are covered. These often include water, gas, and garbage pickup, though this will depend on your agreement with your landlord. Renters do have to pay for their own electric bill. Also, your landlord will cover repairs when something breaks and it’s not your fault. That includes things like replacing an old refrigerator and fixing a leaky faucet.
Homeowners, however, have to pay for all repairs themselves. Because of that, owners need to put extra money aside for emergencies. When the roof starts leaking, a homeowner had better be able to pay to get it fixed, or no one will.
Again, buying a home implies the desire to live in that area for years. It is an investment in life. So, when you do want to buy a place, make sure you do so somewhere you love.
It’s easier for renters to move with short notice. While leases of six months and more exist, it’s usually not hard to find a rental that is month-to-month. When you’re ready to move, you can give your landlord notice of a month or two and put your things in self storage to make moving easier.
Buyers have a different kind of freedom, though. As a renter, you can’t make many changes to your place. You can choose your own furniture, put up your own pictures on the wall, and make other decorating decisions. However, you can’t redo the kitchen with new cabinets and tile. You can’t order construction on a new room at the back of the house. Homeowners can do these things and much more. Often, such changes greatly increase the home’s value.
Losing Your Home
Renters have a greater chance of being forced to move than owners do. Your landlord could sell the house or apartment you live in, forcing you to move. Generally speaking, if you’re a good tenant, you won’t be evicted, but contentious situations can arise, and this can happen even when you’re doing your best and pay your rent every month on time. Make sure that you have enough for a deposit and another move in the bank just in case, so that if you’re asked to move, you can.
Homeowners don’t have to deal with the possibility of someone selling their home from under them or from eviction, except in the case of eminent domain. This happens only rarely, and is when the government needs a piece of land for something like a new roadway. In the cases where this does happen, the government will purchase the house and land. Again, this happens very rarely.
To sum up, in order to buy a home, you need good credit and enough money in the bank for a down payment. You should know what city or at least county you want to live in for at least the next several years. Finally, you should make sure to save extra money for when repairs are needed. Even when you do have the credit and savings to buy a home, however, you may want to keep renting out of convenience.