Buy or rent a house? What is the best? – Inside Indiana Business
Becoming a new owner is now more expensive than we have seen in recent memory. Does that mean you shouldn’t buy? Should you rent instead? It depends.
Home prices have risen nearly 30% since the start of the coronavirus pandemic in early 2020, and prices continue to rise due to a shortage of availability and increased demand.
Due to the bidding wars in home buying and rising mortgage rates, there is also a strong demand for rental properties. According to Zillow, rent is up nearly 15% over the past 12 months and the availability of rental properties is at an all-time low.
What about mortgage rates? According to Freddie Mac, a 30-year mortgage today is in the 5.0% range from 2.75% in January 2021.
What should you do?
First, run some numbers to determine your financial situation.
- Calculate a monthly budget for a mortgage and a rent payment.
- Consider an additional allowance for repairs, maintenance, property taxes and insurance if you buy a home. Don’t forget to add the cost of renters insurance if you are renting.
- Compare the total monthly purchase and rental expenses for the homes you are considering.
- Determine your available money for the down payment on a home (10% to 20% of the purchase price is typical).
- Make sure you have extra cash for furnishings, whether you rent or buy, plus the cost of potential repairs and renovations if you buy.
- Calculate your current debt-to-income ratio (how much of your gross monthly income is spent on debt, like a car loan, credit cards, etc.).
- Check your credit score – the higher the better when getting a mortgage and renting a house or apartment.
Next, consider your job and family situation. This could impact the length of your stay in a home or rental property. If you think you might move in a few years, you’ll need to factor in the cost of selling a home or breaking a rental lease.
Research the market growth of the area you intend to move to: a growing community would suggest that a home would appreciate or at least retain its value, which is ideal for a buyer. If you are a tenant, this may cause your rent to increase at a higher rate than in other communities.
Challenge your “desires” to raise your family in the community or neighborhood and your desire to be part of it.
Considering the above factors, speak with a realtor and mortgage lender to determine your options for a new home.
Advantages and disadvantages of leasing versus buying
Purchase: Your home is an asset, and even if you have a mortgage, you’ll gain valuable equity as the loan is paid off and the home’s value increases.
Lease: Your rent payments are an expense, not an investment. Rent helps the owner of the rental property pay off their mortgage or management fees.
Purchase: If you have a fixed rate mortgage, your mortgage payment will be constant for the life of the loan.
Lease: The cost of rent is subject to increases at the end of each rental period.
Purchase: Mortgage interest and property taxes are deductible expenses on your tax return.
Lease: Rent payments are not federally tax deductible; however, some states allow certain state-level deductions.
Purchase: You can renovate and modify your house as you wish.
Lease: This is not the case when renting.
Purchase: Home ownership offers more stability over time.
Lease: Tenants tend to move more often; your neighbors probably will even if you don’t.
Purchase: You will have to shell out money for the down payment, even if you take out a mortgage for the purchase.
Lease: A security deposit equal to one month’s rent or more is usually required when renting.
Purchase: You are responsible for the cost of repairs and maintenance (new roof, windows, landscaping, painting, etc.)
Lease: No liability for repairs and maintenance. However, the landlord took this expense into account when determining your rent payment.
Purchase: If you decide to move, it can take time and money to prepare your home for sale, and more time to sell it.
Lease: Whether you break your lease or move somewhere else when your lease ends, you can just pack up and go.
When looking to “move out,” it’s best to do your financial assessment, research your options, and consider how long you plan to live in the property. Generally, if you plan to stay in the home long term, buying makes more financial sense than renting in most circumstances. Ultimately, however, it may come down to personal preference.
Kathy Hower, CFP, is a Senior Wealth Advisor at Bedel Financial Consulting, Inc., an Indianapolis-based wealth management firm. For more information, visit their website at www.bedelfinancial.com or email Kathy at [email protected].