Five Questions to Consider when Deciding between Buying & Renting

Your intended length of stay has a huge impact on whether it makes more sense to rent or buy. There are many costs associated with the process of buying a home outside of the cost to purchase it–brokers’ and appraisal fees, title insurance, mortgage origination fees, and closing costs. The longer you remain in a house, the more time you have to spread out the costs. Selling the home within a few years may not offset the fees due to there not being enough appreciation.

The primary argument in favor of purchasing a home is that you build equity in a valuable asset that can boost your long-term net worth. In contrast to this, paying rent each month seems like spending rather than saving. Rent may actually be less costly after factoring in all of the expenses associated with ownership.

• Property taxes
• Insurance
• Maintenance (it’s recommended to budget at least 1% of the value of your home each year to cover routine maintenance)
• Unforeseen expenses such as replacing a heating and cooling system or roof

Focusing solely on the monthly mortgage payment versus monthly rent may be overlooking additional costs of ownership.

Traditionally, the costs of homeownership have been offset by tax savings generated by the mortgage interest deduction. Recent changes to the tax laws have lowered the cap on the amount of mortgage interest that can be deducted. Interest paid on home equity loans or lines of credit is still deductible provided that the money is used for improvement to the home. Before you make the decision to purchase, we recommend doing your homework on how current tax laws will affect you by reaching out to a certified tax professional.

The real estate collapse in 2007 showed us that home prices can suffer major declines. Before buying a home, consider how your finances would be affected if your home’s value increased slowly or not at all. Understand that buying a house with the intent of it serving as an investment can be risky. Do your research. Though houses do generally go up in value, they don’t always. It can help to think of your home as a place to live not just an investment.

Make an accurate comparison between the financial impact of renting and buying by factoring in the complete costs of homeownership–not just mortgage versus rent payments–as well as how owning would affect your taxes. A rent vs. buy comparison can be done using the price-to-rent ratio, which is calculated by dividing the home value by the annual rent amount. If this number is less than 20, buying may be a better option for you. Conversely, if it is greater than 20, renting might be best. You can find online rent vs. buy calculators that let you plug in your own numbers to see the difference that buying or renting has on your long-term finances.

There are benefits and drawbacks to each option. Both are major financial and lifestyle decisions and there isn’t a right answer for everyone. Before signing a mortgage or lease, weigh the benefits and drawbacks of each choice.