We are still in the midst of what most would consider a great time to buy a house. Benefits are plenty for first time home buyers and those looking to trade up alike, including sizable tax credits and low interest rates. I personally know a number of people currently renting a house that are finally considering buying a new home.
One argument used to convert renters to homeowners is a side-by-side comparison of mortgage payments to monthly rent. Realtors often like to tell potential buyers that renting is like “throwing money away.” I happen to disagree with that logic, and think renting makes a lot of sense in certain scenarios. Considering the lessons we’ve all learned from the 2008 real estate bubble, building equity is no longer a sure thing either.
Comparing rent to mortgages and declaring mortgages a cheaper option is to compare apples and oranges. Let’s assume a potential home buyer is considering two houses of equivalent square footage. One home rents for $1,000 a month. The other home could be financed with a principal payment of $1,000. Based on these two costs alone the deals look equal, however there are a number of other factors to consider.
Property taxes. One of the benefits of renting is that you are not responsible for paying property taxes on the home. The bill still comes to your landlord. Of course, if you own a home you get a tax deduction on mortgage interest, but depending on your income this may or may not be a wash.
Insurance. Homeowners insurance is practically a requirement when buying a home (in fact, most mortgages require it to underwrite the loan, and even if they didn’t it is still a good idea). Renters should investigate renters insurance as it is typically very cheap relative to the contents of your rented home. Since renter’s insurance is usually cheaper than home owner’s insurance, renters have a slight advantage here.
Maintenance/Repairs. This is the big one. Hot water heater bursts in the middle of the night and floods your utility room. Who pays for the repairs and cost to replace the water heater? If you own the home it will come from your emergency fund (hopefully). If you rent, a quick call to the landlord is all that’s required and they are on the hook for repairs.
Same for ongoing maintenance of the property. Landlords are responsible for things like painting or replacing siding on the exterior of the home, putting on a new roof, and any other updates required over the years. Renters are typically responsible for things like lawn care and keeping the interior in good shape (walls, carpet, etc.).
For this reason, it is important to have a solid emergency fund before taking the plunge into home ownership. Take it from me, if you buy a home without much in savings, something expensive will break within the first 90 days. It’s a sure bet. If it can happen, it will.
Freedom. Even though freedom is not a tangible cost of renting or home ownership, it is still a very important factor when choosing where to live. Renters typically sign a lease or rental agreement for a specified time (usually one year). Most people who buy a home sign a 30-year mortgage, and unless they pay off the mortgage early, they will be stuck with the debt for decades to come.
Guess who can pick up and move easier if the local economy sours? Guess who can move to a different part of the country if they decide the heat/cold no longer agrees with them? Yep, it is the renters. Buying a house is a big commitment, and if you are still unsure about planting roots in your community, job, etc. then it might make sense to rent a little longer.
It is a great time to buy a home with plenty of inventory, motivated sellers, tax incentives and low rates. But none of those things matter if you are not in an position to buy. Resist taking on the added responsibility, and the debt, if you are not ready.