Wondering if you’re better off continuing to rent or if you should start putting your resources towards buying a home? A lot more goes into answering this question than just, “which costs more, rent or a mortgage?” There are pros and cons to each that you should be aware of before making such an important financial decision.
Renting a Home or Apartment
Renting often has a negative connotation because of the stigma that “you’re just throwing money away.” While putting money towards an investment is great, renting is definitely not “throwing money away.” You have to live somewhere, which usually costs money in one way or another, whether you choose to rent or buy.
Pros of Renting
- No long-term commitment – While most leases are for 12 months, this is a much shorter period of time to be locked in than what you would be with a typical mortgage. If you’re renting and your lease is up, you can just pack up and go, no questions asked. Renting is especially good if you don’t plan to be somewhere for more than a few years or if you just aren’t quite looking to settle down yet.
- Rent payments may be lower – While the opposite can also be true, rent payments are often less than a mortgage payment.
- Don’t have to pay for maintenance and repairs – As a renter, you can just call up your landlord or property management company when something breaks, and it’s their responsibility to fix it.
- No property taxes – Since you don’t own any property, you don’t have to pay any hefty property taxes. Your landlord, however, is paying those taxes. So, since you’re paying him or her rent, you’re probably helping with a chunk of those taxes anyway.
- No homeowners insurance – No need for homeowners insurance if you don’t have a home. Renter’s insurance is something you should absolutely have as a renter, but it is usually much less expensive than homeowners insurance.
- No large down-payment required – Renting usually requires a security payment and/or first and last month’s rent upfront, but this fee is typically much less than a down payment on a house.
- Some utilities may be included – Many apartment buildings and complexes offer some utilities, like trash and snow removal, for free.
Cons of Renting
- Not building any equity – Since you’re paying rent to a landlord, every dollar you pay in rent is gone forever. When you’re paying on a house that is yours, you are gaining equity, which you can get back when you sell the house. If you plan on staying in the same location for more than a few years, it may be smarter to buy a house.
- No Federal tax benefits – While you don’t have to pay property taxes (directly, at least) you are also not getting any tax benefits out of paying rent like you would be if you were paying on a mortgage.
- Not as much stability – Renting means that you could be up and out of a place fairly quickly if the landlord decides to sell the building or increase rent past what you can afford. When you’re living in a building owned by someone else, you are basically at the mercy of whatever they decide to do with the property.
All in all, renting can be a great idea if you don’t intend to stay in a place for very long or if you can’t afford to purchase a house in your current situation. Don’t think of it as “wasting money” because you have to live somewhere. In the long-term, buying a home is more profitable and more stable, but if you’re not ready for that responsibility or commitment yet, renting is always an option.
Owning a Home
Many people’s definition of “success” is happily settling down in a community and becoming a proud homeowner. The prospect of buying a home is an exciting one – are you ready to achieve the American dream?
Pros of Owning a Home
- You’re building equity – Every dollar you put towards your mortgage’s principal is a dollar of equity – ownership of the property. This equity can be used later through a home equity loan or home equity line of credit. Most, if not all, of the money put towards your mortgage’s principal will come back to you when you sell your home. If you make improvements that increase your home’s value or if the housing market improves, you even have the opportunity to make money when you sell your home.
- Stability – Owning a home gives you additional stability that you don’t have when renting. You never have to worry about your landlord deciding to sell the place without your consent.
- More freedom with the space – Since you own the place, it’s yours to do with whatever you want. No more worrying about whether or not you’ll get your security deposit back every time you want to hang a new picture frame. This freedom allows you to get creative and build a place you truly love.
- Federal tax incentives – Some homeowners qualify for federal tax incentives when they are paying interest on their mortgage.
- Fixed payments – If you have a fixed-rate mortgage, you can enjoy the stability of fixed payments. Unless you have an ARM (adjustable rate mortgage), you never have to worry about your payment going up like you do with rent.
- Sense of pride and community – Owning a home is part of the American dream. Homeownership comes with a sense of pride and accomplishment that just isn’t quite there when you’re renting. Putting down roots in one place also gives you a sense of community.
Cons of Owning a Home
- Long term commitment – As a 30 year mortgage alludes, owning a home is a long term commitment. Sure, you can sell your home and get out of the mortgage earlier, but then you are also forced to go through the (possibly long and grueling) process of selling your home.
- You’re responsible for the maintenance – Toilet broken? You have to pay for it. Roof leaking? Guess you’ll have to get a new one. Water heater not working? That’s up to you, too.
- Large down payment required – When buying a home, a large down payment is usually required. Some government backed mortgages allow first-time home buyers to put down a smaller amount, but it is still probably more than the security deposit you would need to rent. Even if you’re only putting down 3.5%, that’s still $3,500 for a $100,000 home. The 20% down payment that is required not to pay mortgage insurance is $20,000 for a $100,000 home. The plus side of this? All of that money is building you equity and its money you could see again when the time comes to sell your home.
- Homeowners insurance and property taxes – Property taxes and homeowners insurance are two additional costs of owning a home that you wouldn’t have (at least not directly) when renting. On the bright side, this is usually split up over 12 months, so you’re not paying the entire fee in one lump sum.
- Possibility of home value decreasing – As with any investment, there is always the chance of your home’s value decreasing. If you keep up with home maintenance and renovations when needed, you can help combat any lost value.
- Usually more expensive than renting – Buying a home is generally more expensive than renting, but this is not always true.
Owning a home gives you something you can’t beat – a sense of pride in accomplishing the great hurdle of becoming a home owner. Putting your money towards an investment, and not just a temporary arrangement is also very advantageous. At the same time, if you’re not ready for a home, renting is not “wasting money” and is a good stepping stone before buying a home. It is important to make sure you’re ready for the responsibility of a home, instead of making the choice because of outside pressures.
Learn more about the process to homeownership at Patriot Federal Credit Union
If you’re ready to take on all the perks and challenges that come with being a homeowner, but aren’t sure where to start, Patriot can help. Visit our website, stop by one of our branches, or call us at 717-709-2580 to speak with one of our friendly and knowledgeable mortgage consultants. Our job is to make your dreams of homeownership come true. No matter how familiar or unfamiliar you are with the home-buying process, we want to be there with you every step of the way.
You can also check out the Home Loans section of our Learning Center for more helpful information on purchasing a home and what to expect.