Rent vs Own: Which is Best for You?
To rent or to own? This age-old question has no one-size-fits-all answer and knowing the best option for you can be complicated and overwhelming. While there are pros and cons to both renting and becoming a homeowner yourself, it is helpful to examine your personal, financial and lifestyle goals before making a decision.
Circumstances play a role in choosing whether to be a tenant or to buy a home. Continue reading to learn the basics of renting and owning to help you determine which one is right for you.
When you should rent
Homeownership is not for everyone. Renting might make more sense for those who prefer to leave home maintenance to a landlord or property management companies. Of course, finances play a large role in choosing to become a tenant as well. Perhaps you would like to buy a house, but the cost of real estate in your area makes that harder to achieve. This often occurs when moving from a rural area to a new city. In this case, it could be smarter to rent and save for a time when the market is more conducive to buying.
It’s important to look at your potential monthly housing costs as a renter. The cost of renting may include more than just the actual monthly rent price, like utilities and any fees. Before moving into a rented space, it can help to create a projected monthly budget to see if it’s sustainable on your income. Here are few of the most common rental fees that should be budgeted into the potential cost of living in a rented space.
- Application Fee and Security Deposit: Be sure to remember to budget in application fees, which can be a hidden cost that is easily overlooked. A security deposit is sometimes required in order for the landlord to have some money to deal with any damage.
- Parking: Some apartments, townhomes and housing complexes charge a monthly or yearly parking fee, which varies depending on location.
- Renter’s insurance: This is generally a low-cost requirement that benefits both the renter and the landlord in case of disaster during the lease term. Sometimes, renter’s insurance is not required, but it is still smart to get regardless.
- Utilities: There is a large variety of costs associated with utilities, depending on location and ownership. Some utilities are included in rent, while others are paid separately by the renter. These can include electricity, gas, trash, internet, cable and water.
- Laundry: Some rented spaces come with an in-house washer and dryer, but if the place you are looking to move into doesn’t, it is important to add in the cost of doing laundry.
- Pet fee: If you have a furry friend, the cost of renting might go up. Some landlords or property owners require a one-time fee, while others ask for a monthly fee to be paid along with rent.
These costs don't usually change, and you can depend on your cost of living to stay predictable, which is often not the case for homeowners. Renting also offers benefits for those who move around often or otherwise don’t have a lifestyle that could support the time commitment of homeownership.
When to own: Can I afford a mortgage?
If you are seriously considering buying your next home, it can be useful to understand all the responsibilities and requirements of a homeowner. While owning a home can be a great asset to your financial portfolio, buying real estate is not right for everyone. Again, this is situational, and your personal goals, home location and finances should be taken into account. Be sure to take a look at your credit score and see what kind of loan you are qualified for.
The upfront cost of buying a house includes more than just the price tag on the house. Some of the other hidden fees that often come along with buying a house include service charges, pest inspections, survey fees, taxes, and escrow payments.
Alongside the home price, which can vary depending on location and age of the house, there are a number of other expenses that you should make room for while creating a monthly budget. Educate yourself about how to plan for the costs of owning your own home. Here is a short list of example items that should be included in the cost of homeownership:
- Closing costs
- Property taxes
- Professional repairs
- Monthly mortgage payment
On top of monthly housing costs, take a look at whether you can afford to pay a monthly mortgage. Luckily, there are many different kinds of mortgages available for different circumstances. RMS knows that this can be confusing, but we can help you choose the mortgage that’s right for you. Be sure to keep your eye on changing mortgage interest rates, and leave room for expansion.
If you want to create a space for you and your family to live in for many years, homeownership gives you this control. Even though some neighborhoods have homeowners’ associations that have aesthetic restrictions, you can decorate and curate your home to satisfy your personal desires.
Mortgage payment vs rent payments
If you are currently a renter, you may have noticed that some monthly mortgage payments are about the same as your monthly payment for a rental property. Before you go out and purchase a house - there are other important factors you need to consider, to ensure your homebuying journey goes as smoothly as possible. For instance, when considering your budget, what kind of mortgage rate you qualify for? Or how does your FICO® score affect your home financing opportunity?
As a homeowner, mortgage payments make up the bulk of your monthly costs. Most of the time, you’re paying on mortgage interest, and it could be a while before most of the payment is principal. Your credit score can affect how good of an interest rate you can get. However, people who own their own homes can receive a tax deduction, and there is always the possibility that your home value will increase over time, making real estate a valuable asset. Home mortgage interest is usually tax deductible but may have limitations. The consumer should consult a tax professional for further information.
Even typical mortgage payments can be hard to understand and, while just grasping the basics of your payments is a good start, RMS has resources for those interested in understanding the intricacies of mortgages.
On the other hand, rental payments are a little more consistent. During your contract, you know exactly what you owe each month and you can rest easy knowing that any damages or mishaps will be taken care of by your landlord. Plus, renters are allowed the flexibility to move at the end of their lease. Financially, renting could make more sense for you, depending on your lifestyle and your area’s housing market.
Even after sitting down and combing through the pros and cons of renting or owning a living space, you might still be torn. If you find yourself at an impasse, plugging some numbers into RMS’ Rent vs. Buy calculator can help you make a final decision. The calculator compares your current rent (and annual rent increase) with information of the potential property. Some of this requires estimation, but it can help you move into the next chapter of your life with certainty. Loan officers are a valuable resource that can help you talk through your options.
Whether a longtime homeowner looking to move to a new area or a young person interested in your options, it's valuable to keep your finger on the pulse of the housing market. Even if you are settled, it could be worth reevaluating your situation every now and then. Be sure to reach out to Residential Mortgage Services with questions on what is best for you now!