Everyone needs a place to live. Whether you want to own that place or rent is a choice. It needs to be a well thought out decision as both have their pros and cons. Which choice is right for you depends on your finances, interests, goals, and your situation. We help you to make an informed decision in this article.
Everyone needs a place to live and the decision of whether you should buy or rent your next home is a critical one. The rent vs buy option requires careful consideration. The answer, as you can probably guess, is not a simple multiple-choice. It requires thorough research and understanding.
In this article, we will explore both scenarios and will give you the tools you need to make an informed decision on whether you should become a new homeowner or a rent-paying tenant.
Before we begin, it’s important to understand the fact that financial decisions are very specific to each person. Many factors that go into making a big decision like renting or buying your home. Making the wrong decision at the wrong time could become a huge financial burden or incur a loss that you will have to face for a long time. We arm you with the right information so that you can make the right call for your situation.
Becoming a homeowner is a bucket list item for most people. It’s a goal that many people aspire to. Homeownership has many advantages and disadvantages. Let’s look at them one by one.
First, it’s important to understand how to finance your house purchase. Unless you have the cash in hand to buy the property outright, you will most likely have to finance your purchase through mortgage payments or another similar loan. This process itself might be considered a disadvantage because of the commitment and responsibility it requires.
While mortgages and their types are numerous and quite complicated and warrant an entire article dedicated to them, we’ll give you the basics so you can understand them a little better.
To buy a house you typically have to put a 20% down payment on the price of the house. The down payment required varies based on the bank, the economy, and your finances. After that, you pay the remaining amount through monthly mortgage payment to the lender. Mortgage loan breaks up your house payments over 5 to 30 years depending on your choice. The duration affects the monthly payment – the longer the duration, the lesser the monthly payment. There are two types of interest rates you should be aware of when selecting a mortgage plan: fixed interest rates and variable interest rates.
Fixed interest rate loans keep the interest rate constant throughout the term of the loan. There are no fluctuations in the interest rate. The rate % is decided at the start of the loan stays the same for the life of the mortgage. This consistency removes any uncertainties brought by changes to the economy.
While the monthly payment is fixed, a significant part of your payments early on goes to cover the interest. The initial interest you pay on the loan is usually more than what you would pay with a variable interest rate, which has a duration of 5-10 years of your payment.
The biggest benefit of fixed interest rate loans is the certainty of knowing exactly how much money you have to put aside each month for your house payment. This makes it easier to plan and might even be a good deal.
However, this good deal has a big caveat. Fixed interest rate loans are only beneficial if the rate of interest you decide at the time of the loan agreement is low. This can be very difficult to predict and even more difficult to understand. Assuming the value of your households, you can refinance your mortgage if the interest rate drops.
As the name indicates, variable interest rate loans are flexible with the interest rate. It is usually prime plus a certain percentage. The interest rate changes based on the economy – it fluctuates between high and low cycles.
If the economy forces an increase in interest rates, your monthly mortgage payment will go up to reflect this. This might put you in a financial crisis if things get really out control.
On the other hand, if the economy forces the interest rates down, you will have to pay less interest on your mortgage. This reduces your aggregate payments to be less than with other mortgage types. This is a big advantage – if used properly through economic analysis and judgment, it can be incredibly beneficial.
Whether you select variable or fixed interest rate mortgage depends on the economic health of the country at the time of purchase, and your circumstances. If you don’t have a secure job that guarantees a fixed salary each month, neither of these options would be right for you as the risk of foreclosure is too high.
Now that we have the mortgage out of the way, we can better understand why buying a home is a good or bad decision.
Like we already mentioned, an insecure job makes this option risky and should be avoided until income is stable and secure.
Commitment is another factor to consider. To put down money for a house and then paying its mortgage loan for up to 30 years is a big responsibility. You have to be sure that you not only love the house and the area now, but also will do so 10 years down the line. Owning a home makes it more difficult to move for a career or even to change countries. That said, first-time homebuyers often upgrade to another house in a few years. While a house is a long-term buy, it is not a permanent situation.
Cost is another key factor. Besides the payments, any renovation or repair is your responsibility as the owner of the property, and as such those expenses have to factor into your monthly budgeting.
It’s not all doom and gloom though. The biggest advantage of homeownership is the freedom. You own the property and everything in it. Therefore, you can change it to suit your needs within the bounds of legality of course. Your house can be updated to match your vision. You can add a pool, new floors, take down a wall, renovate the backyard, finally have a spacious kitchen with all the bells and whistles, and the list goes on and on. Homeownership brings a certain level of emotional satisfaction and joy.
Besides the ability to customize your dream house, a house is a good asset in your portfolio and can help with diversification. If you decide to sell the house down the line, you might be able to ‘flip’ the house for more than your purchase price. Some investors take this approach instead of short-term flipping.
Also, unlike rent, the money you pay each month goes into paying for the house itself. It doesn’t feel like you’re throwing money away but rather putting it into something concrete and real. Once you pay off the loan, you live rent-free. Well, almost – you still have to pay property taxes. Plus, unlike rent, the monthly payment is fixed with a fixed interest loan.
Like buying your home, renting also has a variety of considerations and questions you have to ask yourself before committing.
This is easily the most important deciding factor. If you don’t have the money for the down payment, let alone the interest and principal charges each month, then you have no choice but to rent.
Rent costs vary greatly depending on the area and size of the property. While the average rent for a one-bedroom apartment in New York City could be around $1600 per month, it could be as low as $700 per month in Akron, Ohio.
You might have to pay a security deposit and some landlords might ask for an advance on a couple of months’ rent. But the upfront costs are still far lesser than buying the property.
If a large part of your monthly salary is taken by your rent, it leaves you with less money to spend on other things. Rents tend to go up when the lease is renewed. You have to factor in the moving charges if you decide to change houses.
For the most part, you can’t change much about the property you’re renting. While you might be able to negotiate with your landlord on certain things like paint, but you still need their permission for any changes you might want to make to the house you are renting. You certainly cannot make structural changes to improve the flow.
Some apartment complexes and landlords may not allow smoking, pets, and even limit the number of guests. This could be a problem for some people.
If you’re not interested in customizing your home exactly to your standards, then rental housing offers several benefits.
Many modern apartment complexes offer amenities like in-house fitness centers, laundry rooms, swimming pools, and even spas for a slightly higher rent. Such costs are still exponentially lower than what you’d pay if you tried replicating the same amenities in your own home.
With less customization comes less responsibility. If you have broken cabinets, a cracked sink, or even a broken door, your landlord will pay for the expenses and will be responsible for the repairs. In other words, it’s their headache not yours unless you caused the damage.
Not everyone dreams of being a homeowner and most young people prefer rental living as it best suits their lifestyle.
If you constantly travel, move countries, relocate for jobs, hate repairs, or just don’t want to commit to living in one place for a long time, then rental living is a great option for you. Not everyone places a huge emphasis on their residence and some people are satisfied paying money each month to live temporarily.
If you prefer to use the money for a better lifestyle such as exploring hobbies, traveling, etc., your home might not be a huge part of what makes you happy.
We’ve given you an overview of both scenarios and now let’s summarize the key points.
If you have a steady job with good growth prospects, you are very particular about your living space, and you are happy living in the same place for at least 10-15 years, then homeownership is a good fit for you.
You will have to decide on mortgage types and how to pay your interest, but with professional help, thorough research, and a little luck, you might not have to stretch your pockets as far as you might think.
On the other hand, if you’re a young professional trying to start or establish a career, then renting is almost always a better option. There are very few strings attached and it leaves you with a lot of room to travel and explore other avenues.
You can decide to settle down later in your career and by then becoming a homeowner might be high on your list than backpacking across Thailand.
We hope this helps make your decision a little easier. Be sure to check out the rest of our blog where we discuss real estate and tips on a myriad of related topics. Like we always say, educated buyers don’t make mistakes. They only make good decisions. So, use this guide and do exactly that.
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