Should You Buy or Rent?
By Shelley O’Hara
- Considering the costs of owning a home
- When does renting make sense?
One of the first questions new home buyers face is whether buying or renting is best. Some people will tell you that it’s clear cut: your rent money is going down the drain, while you can pay close to the same for a house payment and actually make your money go toward something (equity or value in the home). And while cost of renting vs. buying is a definite consideration, you should consider other factors as well. Let’s look at some instances where renting makes sense.
First, you should consider whether you can afford the costs of homeownership. (The associated costs of homeownership are covered later in this article.) Your monthly loan payment has additional costs than just the loan: You also have to pay for home insurance, mortgage insurance in some cases, and taxes. All of these make up your monthly payment. You also need money for a down payment.
If your rental home or apartment needs maintenance, you are probably not responsible. Instead, you call on your landlord for upkeep and repairs. Some rentals also include utilities. When you own a home, you are responsible for maintenance and repairs. Also, you pay for the phone, cable, power, gas, water, and other utilities. Second, you should consider your situation. For example, renting might make sense in the following cases:
- You are moving to a new city, and you are not sure what neighborhood or area of town you want to live in. You may rent to get a feel for the city and then purchase a home after you are more familiar with the city.
- If mortgage interest rates are high, you may not be able to afford a home, or the homes you do qualify for may not be to your liking. In this case, you may consider waiting until the rates are more favorable.
- You are in a transition — looking for a new job, getting married, or getting a divorce, for instance — and you don’t want to commit to a home. If you will only be living in the home for a short while, you won’t recoup the costs of buying and then selling that home. Financially, renting might be the better option.
- You are looking for a home in a seller’s market. In a seller’s market, homes are quickly sold, driving home prices up. In recent years, the home market had been booming, interest rates were low, and home prices were soaring. To purchase a home in this type of market, you need to make an offer quickly, and you don’t have a lot of room for price negotiation (if there are other buyers wanting the same house) or other considerations such as asking the seller to pay parts of the closing costs. You may want to wait for more favorable market conditions. Markets usually go in cycles, so what goes up eventually comes down. Currently, the real estate market gives the edge to buyers; there are a lot of homes on the market, and they are not selling very quickly. In this case, you have more room for negotiation.
- In a down, or buyers market, there is a surplus of homes with very few buyers. In the past few years, the economic crisis has frozen the housing market, causing prices to drop around the country. Buying a home in a down market is an educated gamble. If you wait too long, the market will recover, and prices will go up. If you buy too soon, in the short term, you have overpaid for your home.
As you can see, renting does make sense in some cases, but if you are ready to take the plunge and buy a home, you’ll find lots of benefits (and some drawbacks).
Next article: The Pros and Cons of Buying a Home >>