Owning a home is an admirable pursuit, but that doesn’t mean it’s the right move for everyone. In fact, a home is the most expensive thing most people will ever purchase. In 2018, housing prices increased to a median of $250,000, according to the National Association of Realtors 2018 Profile of Home Buyers and Sellers. Despite the increase in price, 75% of nonhomeowners said that homeownership is part of their American dream. Before deciding whether owning a home is the right move for you, it’s important to consider all the facts.
The pros and cons of owning a home
Purchasing a place to call your own might sound nice in theory, but depending on your financial situation, now might not be the right time to buy. Here are some things to consider before taking on that financial responsibility:
Pros of homeownership
Buying real estate builds your net worth. When it comes to investing, it’s hard to argue with the returns most people get on their homes. In fact, according to a Reuters poll, U.S. house prices are set to rise at twice the speed of both inflation and pay. Besides that, owning real estate is one of the easiest and most passive ways to build your net worth over time. “While it’s true that a monthly rent payment is often lower than a mortgage payment for the same apartment, this simplistic cash-flow analysis ignores the fact that buying allows you to borrow a huge amount of money at a low interest rate for decades,” said Dolly Hertz, a licensed associate real estate broker with Engel & Volkers New York Real Estate LLC.
Owning your home opens up additional potential revenue streams. When you own your place, there are additional ways to monetize it, from renting out the entire home to renting out one of the rooms. “This can be a steady second source of income for you that you can even put toward paying off your mortgage,” said Jeff Fisher, a real estate agent with Property Simple.
Depending on the type of loan you get, buying could mean more budget stability. If you don’t own your place, there’s a very high probability that your monthly rent will increase every year, unless you live in a rent-controlled area. “However, if you take out a fixed-rate mortgage to purchase a property, your interest will never change,” said Fisher. With a fixed number for your largest living expense, it can be easier to budget for other areas accordingly.
Cons of homeownership
There are almost always hidden costs. When you own your home, you are responsible for taking care of anything that goes wrong, which can really add up. “Many people think that they will just be able to transfer their rent payment into the form of a mortgage payment and be done with it,” said Jared Paul, a certified financial planner and managing director of Capable Wealth. What they aren’t taking into account, however, are maintenance, general repairs, insurance, taxes and lots of other fees that crop up. According to GoBankingRates.com, the average U.S. homeowner spends $168 per month on repairs and general maintenance and $130 per month on snow removal and lawn care, along with several other general costs.
It comes with high transaction costs. If your timeline for living in a particular area is three years or less, renting might be a better option since transaction costs are high, said Shirley Hackel, a licensed associate real estate broker with Compass. Besides saving up for a down payment (experts recommend 20% of the cost of the home in order to avoid paying private mortgage insurance), buying a home also involves closing costs.
The pros and cons of renting
It’s not uncommon to hear people liken renting to throwing money away, but that’s not always the case. For some people, renting might actually make more fiscal sense. If you’re on the fence about whether your next move should include buying a home, consider the pros and cons of renting before hitting the real estate sites.
Pros of renting
It provides a certain level of flexibility. If you plan to be itinerant over the next few years, or if you simply aren’t sure exactly where you want to live yet, renting could make more sense since “buying a home makes that kind of flexibility almost impossible,” said Marie Oates, a real estate lawyer with The Hive Law in Atlanta.
There is a decreased amount of responsibility. When you rent a house or apartment, the owner must coordinate and pay for repairs or address any other issues. This is particularly helpful when leaks spring right before you’re about to head out of town for vacation, or the dishwasher breaks after you’ve spent your bonus on new bedroom furniture.
Cons of renting
You won’t accrue any equity. The biggest con of renting, said Paul, is that you aren’t accruing any equity in the property while you’re living there. Along the same lines, as a renter you’re missing out on potential appreciation of the space you’re living in.
You’ll likely have little to no say in any changes. If you’re a renter, you shouldn’t expect to make structural alterations or big decisions, unless your landlord approves them. So when that dishwasher does break, don’t expect to have any say in the new one that gets delivered. And any cosmetic changes you make, such as painting the walls, might need to be changed back to the original before you move.
Rent or buy: Which is right for me?
Deciding whether it’s the right time to purchase a home will involve weighing the pros and cons. Paul said that when he’s speaking with a client about making the decision between renting versus buying, he always includes the following points:
1. Buying a home is never as simple as saying that you could simply substitute in the rent you pay each month and put it toward a mortgage—there are many more costs involved.
2. Buying a home should be just as much a qualitative decision as a quantitative one. In other words, “you should be thinking about the reason you are buying a home, not just the numbers,” said Paul.
With those suggestions in mind …
Buying might be better if…
you’re ready to settle down. “If you want stability in your and your family’s life, then [buying] is a great way to achieve that,” said Paul.
Renting might be better if…
You’re interested in moving in the near future, crave mobility and the chance to live in a new place, are open to changing jobs or careers, or you just aren’t sure about your future. “Locking yourself into a mortgage is a quick way to put a ball and chain on your ankle and eliminate a lot of those things,” said Paul.
At the end of the day, whether you buy a home in the near future will be based on what feels best to you and what works with your financial situation. Researching the pros and cons for both options just means you’ll be going into the process with a better overall understanding of how to reach the best decision.