However, in more recent years, people have been debating whether buying a home is always better than renting. “A lot of financially savvy people are starting to question whether it’s economically rational to buy a starter home or to wait and buy that dream house where they’ll live 30 years,” says Shailendra Kumar, director of financial solutions at Fidelity. When it comes to buying vs. renting, it is important to consider factors that affect you and only you. Just because it feels like everyone around you has bought a home, doesn’t mean it is the right time for you. It can be confusing to navigate the buying vs renting debate.
The common argument for buying is, ‘Renting is just throwing money away, you won’t even own it in the end’. A common argument for renting is, ‘Owning a house is too daunting a feat. There’s no maintenance man to come fix your furnace if it goes out. It’s on you!’ There are arguments both for buying and renting, depending on a potential homeowner’s individual circumstances.
Here are 4 important factors to consider as you make the buy-or-rent decision.
The length of time you plan on staying in your current location has a huge impact on whether you should buy or rent. Buying and selling a home involves many costs, some of which buyers often neglect—including brokers’ fees, appraisal fees, title insurance, and mortgage origination fee. The longer you remain in a house, the more time you have to spread out these costs. If you sell within a few years, the value of your house might not have appreciated enough to make up for these fees. Other expenses associated with home ownership should also be considered, including the cost of homeowners insurance plus other types of insurance that may be necessary for the area. There’s also the cost of maintenance or improvements to the property. It’s important to stay in a house long enough to reduce your debt and to allow for meaningful price appreciation.
There is a common misconception that paying a landlord rent each month and paying for renters insurance seems like spending, rather than saving. Buyers focusing on the monthly mortgage payment versus monthly rent might overlook some additional, hidden costs of ownership. You need to budget for the cost of property taxes, insurance, and regular maintenance. Many specialists recommend budgeting at least 1% of the value of your home each year to cover routine maintenance. If you don’t save enough for a 20% down payment, you’ll probably have to make mortgage insurance payments, which add even more to the cost of owning a home. These are all factors to consider when contemplating a move from renting to buying.
Recent tax law changes have lowered the cap on the amount of mortgage interest that can be deducted. Deductibility is limited to the interest on up to $750,000 of debt on a primary or secondary home. Interest paid on home equity loans or lines of credit is still deductible—provided that the money is used for substantial improvements to the home and that the total home equity debt plus mortgage is under the $750,000 cap. You might not be able to utilize the mortgage deduction if your overall itemized deductions are less than the standard deduction. Over time, more and more of each monthly payment is applied toward the loan’s principal—meaning you pay less interest and receive a smaller deduction.
Making an accurate comparison between the financial impact of renting and buying starts by factoring in the complete costs of homeownership—not just mortgage versus rent payments. An accurate assessment of how owning a home would affect your taxes is also to be considered. Rather than focusing on monthly or annual costs of the buy versus rent decision, consider which option would have a greater positive impact on your overall wealth. For example, let’s say your total costs of ownership were $2,000 a month and you could rent a similar property for $1,800 a month. A quick rent vs. buy comparison could be done using the price-to-rent ratio. Price-to-rent ratio is calculated by dividing the home value by the annual rent amount. Generally, if the price-to- rent ratio is less than 20, buying might be a better option. On the other hand, if the ratio is greater than 20, renting might be better. However, the price-to-rent ratio is just a rule of thumb. This rent vs. buy calculator lets you plug in your personal numbers to see the difference that buying or renting might have on your long-term finances.
If you’re uncertain of the direction to go, contact your team at Kansas City Credit Union. We can help you determine the next steps, and if appropriate, guide you through the process of becoming qualified for a mortgage.
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