We all need a roof over our heads to make us feel comfortable and secure, but people tend to have different ideas about what that experience should look like. For some, moving from place to place in search of a great deal on rent is the way to go, while others dream of one day owning their own house. There are also some people who fall somewhere in the middle, renting a smaller affordable property, while they save up what they need for a down payment on a mortgage.
Before moving, it is always a good idea to know what the average property prices are at a location. For example, if you are going to move to Charlotte, you may need to know the average rent in Charlotte or the average home price.
If you are currently asking yourself, “should I buy or rent”, then the only way to really answer that question is to take a closer look at both options to see which one works best for you right now. There is no right or wrong answer here, as the decision to buy or rent is one that is truly personal. You will find your answer after looking at a few different factors and we will discuss many of them below.
Here are some factors that will affect your decision to buy or rent. Let’s now dig a little deeper into some of the things that you will need to consider when deciding to buy or rent a house:
1. Comparing the Cost of Renting or Buying
We are not just talking about the monthly payments that you will need to make here, but also the other costs associated with both buying and renting. Let’s imagine for a moment that you are deciding to buy a home. Before any lender gives you a mortgage, they will want to see some type of down payment, which could be as high as 10% or 20% of the total cost of the house.
The amount of money that you are approved for with a mortgage is dependent on the amount of money that you make each year. The amount that you put down, as well as your current financial situation will determine what rate of interest you get for your mortgage. That, plus the length of the loan will determine your monthly payment, after which, property taxes will be added. That means, each month, you will be responsible for paying the principal on your mortgage, the interest, a portion of your property taxes, and a portion of your homeowner’s insurance. It is recommended that you do not exceed a 36% debt to income ratio with your mortgage, although some lenders will allow you to go up to 40%.
For a rental home, you will likely be asked to pay first and last month’s rent, as well as a security deposit, which is often the equivalent of one month’s rent. You will get that security deposit back if you move, assuming the house is still in good shape. It is also important to note that you will have moving expenses tacked onto the amount you pay when you are moving into a rental home, as you will need to pay to have all your things delivered to where you will live. These moving expenses need to be considered every time that you move from one rental unit to another.
2. The Duration that You Plan on Living in the House
If you are planning on settling into a new home for the foreseeable future, then buying a home becomes a very good option. This is certainly the better option for those who prefer stability and who are looking to build a career and a family in a specific location. The school district becomes incredibly important in that scenario, as does access to shopping, medical, and solid infrastructure. If you have a career that moves you around a lot, or are just a free-spirited soul, then renting is probably the better option. While this doesn’t mean that stability is not important to you, it’s something that is probably going to be more important later in life once you have settled on a definite career and family path.
3. Your Responsibilities with Renting and Buying
This is something that could also fall into the cost category that we discussed a little earlier. Any property, regardless of whether it is owned or rented, is going to, at some point, require repairs and maintenance. When you ask yourself, “should I rent or buy”, and you make the decision to buy, you are taking on a great deal of responsibility. Any time anything goes wrong in that house, such as plumbing or electrical issues, you are on the hook to pay for those repairs. You may also have a homeowner’s association to deal with, and they may very well require you to keep the property up to a certain standard, including keeping the grass cut and making sure that you only use a certain color of exterior paint for the doors and window frames.
With a rental property, all those repairs and upgrades are handled by the owner of the home, which means that you are not on the hook financially. While this may sound like the better deal, it is worth remembering that not all owners are quick to make necessary repairs.
4. The Investment that You are Making
Buying a home is not always going to be a good investment, because you can never be sure that you will sell it for more than what you paid for it, plus what you have put into it over the years. However, once you add in the savings that you will see from not needing to pay moving expenses or paying rent (mortgage), once your mortgage is paid off, you may start to see that buying a home can be a good investment that is worth making.
Of course, when you go to purchase a home, you need to do more than consider the cost of your mortgage each month. First, you will need a down payment of at least 20% of the price of the home that you want to purchase. The closing costs that you will need to pay as well, normally come in at approximately 4% of the purchase price, which means that you are looking at putting out a good chunk of cash before your keys can even be handed over to you.
As soon as you move into your new home, you will need to make sure that you have the money set aside each month to pay your mortgage, including the interest, as well as your property taxes and homeowner’s insurance. You will also want to set aside money each month, so that as things around your new home need to be maintained or repaired, you have the money to take care of it all. We normally ask you to consider taking 1% of the purchase price of your home for your property taxes, and another 1% for your homeowner’s insurance and setting it into a saving’s account to cover those expenses for one year. When it comes to repairs and maintenance, it is recommended to set aside one and a half percent of the purchase price of your home each year for those expenses.
As you are paying all those costs over the years that you live in your new home, you will find that your home will increase in value by approximately 3% each year, while inflation will also make it go up approximately 2% each year. You may still not even out in the end when it comes to your investment, but you will have had a fabulous place to live and the capability of staying in one place the entire time that you were there.
5. Advantages and Disadvantages of Buying and Renting a Home
- More difficult to move around
- Hidden costs such as repairs, taxes, insurance, etc.
- House responsibilities when it comes to repairs and maintenance
- More privacy
- Can have as many pets as you want
- Interest paid on mortgage is tax deductible
- Earn a return on your payment
- Can customize and renovate the home you like
- A way to save money
- The hassle of moving when leases are up
- No maintenance or repair responsibilities, although the owner may not do them in a timely manner
- No hidden costs when it comes to rent or security deposit
- Can move around whenever you want to
- No return on your investments, no matter how small they would have been
- Can easily upgrade to larger units if necessary
- Monthly rental could increase
At the end of the day, it is often money that is the deciding factor on whether you decide to buy a home or look for a house to rent. Calculating the costs of both is not that straightforward, but the good news is that there are tools out there that can help you get a clearer picture of the financial side of your decision. One of the most effective of these tools is the buy or rent calculator. Based on your location and the amounts that you are willing to pay to buy or rent, you can get a true idea of which of the two options is the better financial decision for you. While this tool should not be your sole method of deciding whether to rent or buy, it’s certainly a very good starting point.