Homeownership used to be a vital piece of the American Dream, but today’s economy has seen a major upswing in renting. The debate over which is better has been raging on for years now, with proponents on both sides arguing that their choice is more financially viable than the other.
When deciding which is the right option for you, there are a few important questions to ask yourself. Here’s what you need to know:
How Long Will You Live There?
If you only plan on staying in the area for a short time, renting might be the better option. However, owning a home for just two years could help you turn a profit when it comes time to move. Using a comparison calculator can help you determine which option would end up costing you the least amount of dough.
If you lived in an area where the average home price was $700,000 and the average monthly rent was $2,500, a home would become more profitable in two years provided you made a 20% down payment and the rent went up 5% each year. This can vary wildly, however, especially when looking at studio apartments in NYC.
Are You Aware of the Costs?
On the surface, it may seem as though you only need to compare rental prices and mortgage payments. However, you should also take the “hidden” or extra costs into consideration before making a decision.
Renting does not build equity like a home, nor does it come with any federal tax benefits. To put that into perspective, a $200,000 home with 4.5% interest rate could net you around $3,600 in tax deduction per year. You would also need to pay for renters insurance, which is roughly $20 a month.
On the flip side, homeowners need to pay for home insurance, private mortgage insurance with under 20% equity, property taxes, and maintenance. Combined, these can cost anywhere from $5,000 to $8,000 per year on a $200,000 home. This would drop down to roughly $2,400 once 20% equity has been built up.
Are You Wasting Money?
Renting is often considered a waste of money as each month’s rent is just that, the cost to live there for one month. While it is true that owning a home comes with the high possibility of coming out ahead once that mortgage is paid off, there are ways you can save money while renting.
If the cost of owning a home is simply too high, then figure out how much money you can put into a 401k, retirement fund, or high yield saving account. A home might come at a lower cost in the future, but you can still stock away a nice chunk of change for your future while renting a great place.
Which Option is Right for You?
Ultimately, the answer comes down to how much income you have at the moment and whether or not you’re ready to bunker down for a few years. If owning a home would stretch your finances too thin, then it makes more sense to rent and save what cash you can. If you have the money for upfront and year-long costs, then owning a home will absolutely pay off down the road.
3/29/18 Happy almost Friday! My boys got all A's and B's on their report cards. So proud of them!