There are many benefits to owning a home. But sometimes, renting can seem to be more economical, especially in the short term. While there may seem to be compelling reasons to rent, perhaps the better question is, can you afford not to buy a home? When considering your options, goals, and future plans, it is important to gather as many facts as you can about renting vs buying before making the decision that is right for you. There are two ways to think about the costs involved in renting vs buying: short term and long term costs.
Short-Term Costs: Renting vs Buying
When considering the short-term costs of renting vs buying, renting might seem the easy winner. Renting costs involve rent, which may include certain fees and taxes. Renters also pay for utilities, although some landlords will include some or all of the utility expense in the rent. Some landlords also require renter’s insurance, and if you want to keep a pet on the property, they might charge additional fees or even a higher rent for your four-legged family member, as well.
So with all these fees, is buying the better short-term option? Many people think about the hurdle of the down payment and go no further. It can be daunting to consider investing large sums of money into a property when a rental usually only requires a deposit roughly equivalent to the monthly rent (sometimes a bit more). But there are other short-term costs as well. Closing costs, property taxes, and insurance are all required to purchase a home. Many times, these expenses are included in the mortgage payment; sometimes they are not. As a homeowner, utilities are your responsibility, as are maintenance and repairs. Added together, the short-term costs of home ownership may keep some away.
Long-Term Costs: Renting vs Buying
On the other hand, examining the long-term costs of renting vs buying reveals several more significant points to consider. Rents in many cities have seen large increases in recent years – and still seem to go up every year. Landlords can raise your rent whenever you renew your lease, and you have little control over how long you actually get to stay in a rental property. While there are typically few costs involved in maintenance and repairs, you also can’t customize your space in any permanent way without the landlord’s permission, and then if you move, any improvements you’ve made to the property now belong to the landlord, not to you.
One important factor is that if you can qualify for a favorable interest rate, your mortgage payment may be well below what you’d pay in rent for a similar house. Typically, your mortgage payment will stay the same for the life of the loan, unless you refinance or make other changes. When you rent a home, you are paying your landlord’s mortgage. You won’t get any part of that money back. For this reason, a mortgage is hands-down better in terms of the potential for a future return on your investment. Once you make all your payments, the property is yours to keep. Another benefit of buying vs renting is that improvements you make to a property you own tend to increase the value of the property. As your property increases in value, you may be able to use the equity in your home to do other things, like pay for family vacations or send your kids to college.
So while there is much to consider when choosing to rent or buy, the question of what you can afford should include more than just deciding which is cheaper, a down payment or a security deposit. In the long run, can you really afford to lose out on the kind of benefits and future potential that home ownership has to offer?
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