Renting A Home Compared To Purchasing A Home

May 2, 2023

Everyone needs to live somewhere, and given how impactful one’s living situation is to one’s overall level of financial and mental well-being, it is important to carefully compare available options before making long-term decisions. But as with most major decisions, living arrangements are by no means one-size-fits-all. Different preferences and lifestyles fit more naturally with different kinds of housing options. One of the basic choices everyone needs to make in this area of life is deciding whether to own or rent their home. Both alternatives come with costs and benefits, and which one is right for a particular individual depends on a range of factors. Here are some of the key differences that are important for consumers to bear in mind when deciding where to live.

Upfront Costs

One major difference between renting a home and purchasing a home is the upfront costs associated with each. Homes are the most expensive purchase of most individual’s lives, and so even among those with lots of money saved up, individuals usually seek out home loans to help support the cost of their new purchase. Many lenders require borrowers to place a down payment on the home, typically ranging from five to twenty percent of the value of the purchase. For a home that costs 300,000 dollars, a five percent down payment is 15,000 dollars. At twenty percent, the down payment is 60,000 dollars. It is often a good idea to pay as much as possible in one’s down payment, since it will reduce the overall amount of the home loan, ultimately saving in interest costs over the long run. Other factors that influence initial costs of purchasing a home include any fees associated with taking out a loan and the costs of any repairs needed before moving in. In the short term, it is almost always more expensive to buy, as renters will generally have far fewer upfront costs. There will usually only be a refundable security deposit roughly equal to one month’s rent due before move in, though some landlords also require first and last month’s rent. If the rent for an apartment is 1,000 dollars per month, the tenant might only be required pay 3,000 dollars before moving in.

Continue reading to learn about the recurring costs for each option.

Recurring Costs

Renters and homeowners both incur recurring costs, and the most obvious and significant of these are the regular monthly rent or mortgage payments. Another category of recurring costs are utilities like water, electricity, trash, gas, and cable or internet packages. Utility costs usually do not vary much between renters and homeowners, although in some circumstances, landlords may agree to cover the costs of certain utilities for their tenants, which could save renters anywhere from twenty to two hundred dollars per month, depending on the arrangement. Finally, all homes require regular maintenance and repair. For renters, most of these costs are covered by the landlord. Homeowners, on the other hand, will need to pay for any services not covered by their insurance, and they will therefore usually pay more to maintain their home each year. However, renters face a major disadvantage in this category. When renewing a lease, it is possible for landlords to raise the cost of rent, forcing the tenant to choose between staying in the home or finding somewhere else to live. Homeownership has a comparative advantage here. As the mortgage gets paid down over time, the monthly interest costs begin to decline. And once the mortgage is finally paid off, a homeowner will only need to pay to maintain the property, no longer needing to send off a large mortgage check each month. So, in the short term, the monthly expenses of home ownership will typically be higher than what is paid by renters. However, in the long run, homeowners stand to save a considerable amount each month as their loans get paid down.

Continue reading to learn about the costs of relocating.

Relocating

One of the major determinants of whether renting or buying is the best option for a consumer is their expected time at the location. For those thinking about putting down roots and staying at a steady job in the area for the long-haul, it can be a good idea to consider investing in buying a home. In the long run, this may wind up being cheaper. Knowing one is working towards owning a home also comes with an added degree of security and comfort. However, for those who only plan to live in an area for a short period, or who are unsure of their future, renting a home might be far more convenient. Arranging to buy a home requires a major commitment of time and money, and for those planning on relocating every few years, it is often simply not worth it to go through the process. Moreover, it can also take considerable time and effort to sell, leading to further hassles for each move.

Continue reading to learn how equity building comes into the equation.

Equity Building

Equity simply refers to the percentage of one’s home owned by the borrower and not the bank. For those who pay for their new homes entirely up front, they immediately own the house. But most homeowners start with a little help from banks in the form of mortgages. As the mortgage gets paid down each month, the buyer begins to own more and more of the home, increasing their equity. For example, if a buyer borrowed 300,000 dollars to pay for the home, and has paid down the principle by 100,000 dollars, they still owe 200,000 dollars but own one-third of the house. Equity building is where renting and owning really come apart. Renters may pay amounts roughly what owners pay, but when their lease is up, the renter has nothing to show for it. Homeowners, on the other hand, gradually accumulate an extremely valuable piece of property as they build their equity. Once the mortgage is fully paid down, there are no major required monthly payments. Home equity can also be used as collateral for further loans, or can be sold for a hefty sum.

Continue reading to learn about potential tax benefits.

Tax Benefits

There are different kinds of tax benefits associating with owning and renting. One major perk of renting a home is the renter does not need to pay property tax on it. This can be a major advantage, especially for homes in more expensive neighborhoods. At the same time, even if the renter is not paying property taxes directly to the government, the landlord may simply factor those costs into monthly rent. While homeowners will need to pay taxes on their property, there are some tax benefits available to homeowners. A longtime favorite was getting tax exemptions on the property taxes one pays each ear, though recent changes to the tax law have done away with that benefit in future years. However, in most cases, the money spent on mortgage interest payments is still tax deductible, lightening the amount owed to the government each tax season.

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