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Renting versus Buying a Home

7/10/2019

The choice between buying or renting a home is a big one. There is no “right answer” for rent vs buy, but depending on your finances, one may be a better fit for you. To help you decide, review our guide below on the pros and cons of renting versus buying a home.

Pros of Renting

In some cases, renting a home may be a more affordable alternative to buying one, at least in the short term. In many places, the cost of monthly rent is typically less than a mortgage payment. As an added financial benefit, your rent payment may also cover utilities such as electric, heat/air conditioning and water. Additionally, if one of your amenities or appliances breaks down, it’s your landlord’s responsibility – not yours – to fix it.

Renting a home also gives you more flexibility than buying one. Typically, renters sign 12-month leases, whereas many homeowners are locked into a 30-year mortgage. Some landlords may even work out a month-to-month deal with their tenants. This is a great option for those who experience frequent job relocations or want to downsize/upsize.

Cons of Renting

Unlike a mortgage, one downside to renting is that there is no federal tax break on rent payments. Some homeowners, on the other hand, can claim a deduction for mortgage interest and property taxes when they file their tax returns.

Additionally, paying rent offers no long-term financial benefits, because as a renter, you won’t benefit from increased home equity (or value). This means your property can increase in value, but you can’t benefit from it because you don’t own the property.

Pros of Buying

By choosing to buy a home, you’re able to make renovations and upgrades, such as adding square footage, installing smart-home technology or fixing up the kitchen. This increases the value of your home and allows you to build equity and a nest egg for the future.

Since mortgage rates are often set at a fixed rate, your monthly costs are predictable and stable, whereas renters’ monthly costs will more than likely increase from year to year. Sometimes the interest and property tax on your mortgage payment is a tax deduction that you can claim each year, which means additional savings for you. 

Cons of Buying

Homeownership is a long-term financial commitment. You’re not only responsible for your monthly mortgage payments, but you’re also responsible for all maintenance. Unlike renting, you don’t have a landlord who will take on the responsibility for repairs and renovations.

Although mortgage payments are usually fixed, they’re generally higher than rent payments and, during the first 10 years, a majority of this payment goes towards interest. A portion of your payment goes directly to the principal, which lowers the amount that you owe and builds your equity. Another portion goes towards interest and doesn’t lower your balance or build equity. Over time, more of your monthly mortgage payment will start going toward your principal, but it may take up to 15 years before the majority of your monthly payment goes toward your home’s equity.

Additionally, by spending the majority of your total income on home ownership, including your mortgage payments, property taxes, maintenance and utilities, you could become “house poor.” This is a term for when your mortgage is more than 25 percent of your take-home pay. A mortgage should only exceed this if you have no other debts or don’t plan to accumulate more debt.

If you have a lot of debt, whether it’s in the form of a credit card or student loan, you may consider borrowing against your home equity to consolidate this debt, which can lower your interest costs. However, debt consolidation has its own risks. According to Nerd Wallet, using your house as collateral can increase the risk of foreclosure. If your home value decreases, it’s possible you could end up owing more than the house is worth and your repayment plan could last for more than a decade.

Choosing to rent or buy a home is an important financial decision that requires time and a well-thought-out plan. It’s important that you do your research, ask questions and ensure that you weigh the pros and cons of both options before taking the plunge. By considering our tips, you’re already on the path to a brighter financial future.

Erin Ellis

Erin Ellis
Accredited Financial Counselor ®
Philadelphia Federal Credit Union
eellis@PFCU.COM