Deciding to rent or buy a home is a major financial decision. It affects almost every aspect of your life. So, how do you know which option is the best one for your situation?
There are advantages and disadvantages to both renting and buying. Purchasing a home involves several steps that include getting approved for a loan. You also have to come up with a down payment. Renting is easier. It is also more affordable, but do you want to forego owning property?
If you are having trouble deciding, here’s what you want to consider before signing a rental or mortgage agreement.
Do you want to become part of a community or have the flexibility of changing addresses every year or so?
The answer to this question can help you decide if renting or buying is the right option.
Most buyers plan on staying in the home for at least five years. It gives you time to settle into the neighborhood and make the house your home.
You can sell a newly purchased home after a year or two, but you can end up losing money on closing and moving costs.
It’s a good idea to compare the costs associated with renting versus buying.
Initially, renting is often the more cost-effective option. You don’t have to pay closing costs, come up with an adequate down payment, and have cash set aside for home maintenance. Home repairs can also quickly add up, depending on the property’s condition.
Most rental contracts only require a security deposit, along with the first and last month’s rent.
Home buying is more expensive in the beginning, but over time it is more cost-effective than renting.
Your mortgage payments are usually lower than monthly rent payments. You also have the option of refinancing. It does extend your mortgage terms, but you are paying a little less each month. Renters can only expect their costs to increase, sometimes by 5% or higher.
Homeowners receive tax breaks not available to renters. Don’t forget about property value. Most home values increase over the years, putting extra equity in your pocket.
Homeownership doesn’t fit every lifestyle. Frequent travelers, either for work or pleasure, may want to focus on finding a rental property. Someone else handles the upkeep, maintenance, and repairs, leaving you free to see the world without worries.
Anyone expecting a promotion to a position in another city may also want to hold off on buying a home. You aren’t going to have enough time to build up any equity in the property. You may also have to take a lower asking price if your move is within a few weeks or days.
Renters may lose their security deposit for an early move, but it’s less of a financial hit than you get as a homeowner.
Before you make any decisions, take a look at your finances. Add up the costs associated with buying versus renting and see what you can comfortably afford.
A common mistake homebuyers make is buying a house they can’t afford. It’s nice to have some extra space, but the problems come when you realize the mortgage payments are higher than you expected.
Ideally, you want your down payment to be around 20% of the home’s selling price. You also want to have enough cash leftover for maintenance and repairs.
Your finances also determine what improvements you can make on the property. For example, if the property is in an area where storms are common you may want to add a portable power generator to keep the lights on. Renters have the advantage of relying on their landlord or property manager to take care of these improvements.
If you are not comfortable with these and other costs associated with owning a home, renting may be a good option for the present time.
Ready to start looking for a new home, contact Franklin Investment Realty today to see how we can help make homeownership a reality.
– Karl Kennedy