Everybody has their own, unique "American Dream" and for most people part of that dream includes owning their own home. Owning a home is one of the biggest financial decisions that many people will make in their lives as it is a long-term investment. Owning a home comes with many costs and limitations so, although it can feel good to own something rather than rent, it is not for everybody.
If you are having a hard time determining whether purchasing a house or renting is best option for you, consider these pros and cons of owning a home versus renting.
Advantages of Homeownership
Owning a home is a hefty goal for many people, below are several important advantages to owning your own home.
#1: Long-Term Investment
During the homebuying process the key is to look and think long term as owning a home is considered a long-term investment. As a general rule of thumb, people are encouraged to purchase a home if you plan on staying there for five years or longer - as this gives your property time to grow in value.
To improve the value of your home plan on maintaining or improving the condition of your property, as this is what makes owning a home a good long-term investment. One of the most common ways to increase the value of your home is by making renovations to your home. However, even if the value of your home depreciates over time, it is still possible the land could become more valuable over time.
#2: Building Equity
Another advantage of owning your own home is that it allows you to build equity. Equity is the difference in the value of your home and what you still owe on it. Your home equity grows every time you put a payment toward your mortgage. Equity is important to have, as it can help you build wealth over time.
#3: Stability & Consistency
Obtaining a fixed-rate mortgage means that you will pay the same amount each month for interest and principal until the mortgage has been paid off. This is different from renting, as landlords have the right to increase rent with every lease renewal or move. Having a stable mortgage payment can help you avoid increases in your housing expenses.
One of the biggest advantages of owning your own home is that you can renovate your home however you want. Renters do not enjoy this benefit, meaning any landscaping or home alterations are not up to them. Being able to renovate and update your home gives you the potential to increase its property value and overall satisfaction while living in your home.
Disadvantages to Homeownership
Although there are several important advantages of homeownership there are also several notable disadvantages that any potential home buyer should keep in mind.
#1: Upfront Costs
Typically, closing costs on a mortgage generally run between two percent and five percent of the purchase price. Depending on the price of the home, this can be a significant amount of money.
Some closing costs include:
- Property taxes
- Mortgage insurance (if less than a 20 percent down payment is made)
- Home inspection
- First-year insurance premiums
- Title search
- Title insurance
#2: Less Flexibility
Another disadvantage of owning a home is that homeowners tend to have less flexibility. For example, if you have a job that requires you to move often, it may not make financial sense to go through the process of homebuying as it can take weeks or months to buy and sell a home. If you must relocate quickly, this can mean paying multiple mortgages as you work to sell your home.
#3: Maintenance Costs
Maintenance costs are another disadvantage of homeownership as if something in your home were to break, you are the one that is responsible for paying the repairs. Unlike rentals, there is no property manager or landlord involved when you own your own home.
#4: Property Values Can Fall
Just like your property value can increase over time, it can also decrease in value if you do not maintain your home - or if the housing market takes a downturn. There is no guarantee that your home’s value will increase. There are a number of factors both in your control and outside of it that could affect this.
#5: Home Costs Lack Liquidity
Houses do have value, however, they usually do not sell as quickly as stocks or other assets. Even if you are in the process of trying to sell your home, you still have to maintain your home and make mortgage payments.
Advantages of Renting a Home
Depending on what you are trying to achieve, renting may be the right option for you.
#1: Costs May Be Lower
Rentals tend to have lower costs so, depending on your living needs and current financial situation, it may be more cost-effective to rent a room in a shared home or a modestly sized apartment. Also, some rentals are already furnished, meaning you don't need to spend extra money on furniture and appliances.
#2: You Aren’t Responsible for Repairs
Another advantage of renting is that in home repairs are paid by the property owner or landlord, meaning you do not have to pay for the repairs.
If you need to relocate for some reason such as a job change, owning a home and managing your mortgage can be difficult. If you do not sell your house as quickly as you would like, you will be paying a mortgage at your old home plus the new one. With rentals, you have the freedom and flexibility to leave once your lease is up, or your landlord may allow you to find someone to take over your lease for you.
#4: Lower Upfront Costs
Compared to the upfront costs of owning a house, rentals tend to have much less upfront costs. To secure a rental, you will likely be asked to put down a security deposit. This is usually equivalent to first month’s rent or several months' worth of rent. Unlike obtaining a mortgage, when renting you do not have closing costs and you may avoid other fees like HOA dues, painting supplies or other renovation costs.
Disadvantages of Renting
While there are many advantages, there are also several disadvantages of renting.
#1: No Renovations or Alterations
Since you do not own the rental property you are unable to make renovations or improvements to the rental property. Some landlords may allow you to paint or make minor adjustments, however, these would need to be approved by the landlord beforehand.
#2: Your Rent May Increase
Another disadvantage of renting is that your landlord has the right to increase rent once the lease is up or if you are renting month to month the landlord can increase rent anytime as long as they give the renter a 30 day notice. So, If you have been budgeting and factoring in a certain amount of rent each month, keep in mind that this amount may change when it’s time to renew your lease. However, you may be able to renegotiate the terms with your landlord.
#3: It Won’t Improve Your Credit Score
Paying your mortgage on time every month can be an effective way to improve or maintain your credit score. Paying your rent on time each month is important, but it won’t necessarily improve your credit score.
#4: Your Home Isn’t Building Value
Again, since you do not own the rental property, the money you pay in rent is not working toward building equity.
Every individual has their own unique situation, so for some people, it may make sense to purchase a home while others will benefit from renting. The pandemic has certainly changed the way that we live, so this can come into play when trying to decide what your next move should be. If you are still unsure about which option is best for you (renting or owning a home) feel free to reach out to a financial advisor for further assistance.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.