Should You Rent or Buy Your Next Home?

Written by Posted On Tuesday, 29 April 2014 11:06

What makes people want to buy a home?

Privacy, proximity to family and friends, ambiance, environment and a sense of community all contribute to the emotional side. Tax breaks, transportation, amenities, and the opportunity to build equity are also factors. But the number one reason people buy homes is the desire to own a home, with the desire for more space a close second.

So why rent? During the economic downturn of 2008, housing lost value for five straight years, illustrating the risks of homeownership. In 2013, despite a dramatic turnaround in housing prices and sales volume, a study by the Joint Center for Housing Centers at Harvard University found that buyers are still skittish.

"Unemployment has remained stubbornly high and incomes have fallen, straining household budgets," wrote researchers. "In this environment, renting offers a flexible housing choice that enables households to adapt to changing financial circumstances—including the need to relocate quickly, whether to find a more affordable home or to take a job elsewhere in the country."

For most households, renting is less of a financial stretch than buying a home. Even in the best of times, homeowners must come up with a substantial amount of cash to cover the downpayment and closing costs, as well as be prepared for upcoming repairs and maintenance. While renters typically have to pay a security deposit plus the last month's rent, the total outlay is usually more modest than the upfront costs of buying. Equally important, renters who want to move do not incur the steep costs associated with selling a home.

Renting also brings greater certainty to household budgeting because tenants do not have to cover the costs of unexpected but necessary home repairs. Owning a home, however, requires money, time, and skill to manage its upkeep. Renting transfers responsibility for maintenance to a landlord, reducing risk and worry for those who prefer to avoid these obligations.

Renting was the best port in the storm, particularly when rental prices dropped in many areas as well. For many, the freedom from maintenance issues and the ability to move when and where they want, is preferable to the long-term commitment to owning a home.

Beginning in 2009, the edge began to move to homeownership. Due to still-low home prices and rising rents, The Center for Housing Policy predicted that home buyers who purchase can build equity within four years, about the same length of time it takes to recoup closing costs. The reason building equity is important is that you can take money out of the home when you leave, which is not possible for renters.

So how do you know if it's better for you to rent or buy a home?

Calculate the true numbers

To make your rent-vs-buy analysis accurate, you must compare similar home sizes in the same area.

For example, if your area's homes rent for $1.00 a square foot, then it will cost you about $2,400 to rent a 2,400 square-foot home. But if homes in the same area are selling for $130 per square foot, then to buy will cost you $312,000.

Your monthly house payment depends on how much you put down. If you put 5% down, you are financing $296,400. At an interest rate of 5.5%, your monthly payment is $1,808, or about $2,513 adding in property taxes at a taxable rate of two percent.

Even though you're paying slightly more to buy than rent the same property, you'll typically earn $37,883 in equity in just five years just by paying your mortgage down.

To calculate these numbers yourself, Click here

One of the disadvantages of renting is that rents can go up. If you get a fixed-rate mortgage, your costs will stay the same, although hazard insurance and property taxes can rise. However, rental insurance can rise, too.

Last but not least, you'll spend $150,780 including taxes on your home in five years, or you can spend $144,000 on the same amount of rent, pocketing $6,780. But with zero deductions, you'll lose the 2% a year in property tax deductions or $6,240 annually, or an additional $31,200 over the five-year period.

Renting is a convenience, and a great hedge when property prices are spiraling downward, but for long-term gain, tax benefits and equity is a better bet.

To find out what rents and sales prices are per square foot in your area, ask your real estate professional. He or she can provide you with a rent VS buy analysis customized for you and your budget.

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Blanche Evans

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