At some point along everyone’s personal finance journey, the homeownership question will raise its head. Whether to continue renting or seek to purchase a home is a momentous decision, and there are clear benefits of both. Answering the question of whether to buy or to rent depends on numerous considerations, financial and otherwise.
Almost every choice in life boils down to navigating a number of competing alternatives. This certainly holds true when making the decision for where to live.
What Are the Advantages of Buying a Home?
There are a number of reasons to consider purchasing a home, for those with the means:
(1) Building equity: If you are like most individuals, you will not have the ability to pay for the entirety of your housing purchase upfront in cash. Instead, you will take a long-term loan known as a mortgage. As you begin to repay your mortgage, you will gradually build up equity (i.e. the portion of the house that you own outright). The alternative, of renting, will leave you with nothing of value at the end of your lease.
(2) Predictability: Taking a fixed-rate mortgage will allow you to plan out with certainty your financial obligations for years to come. Though your property tax burden may increase as the value of the house rises (see below), your monthly principal and interest payments will remain the same.
(3) Peace of mind: Owning a home allows you to be the master of your domain, and you generally will have the freedom to alter various aspects of your home. Perhaps more fundamental to your sense of calm, you do not need to fear ever being evicted if the owners decide to use the property for another purpose (such as selling, moving back in, or allowing one of their children to live there).
(4) Appreciation: The value of the asset you own will increase as you repay your mortgage obligation, but also (hopefully) the worth of the property will go up over time as well. Though there have been dips, home prices have historically moved upwards. This can help you to accumulate wealth while also serving as a hedge against inflationary pressures.
(5) Tax benefits: There are a number of tax-related benefits from owning a home, such as deducting interest payments from your tax burden. If you decide to use a HELOC to make home improvements or fixes, you could be eligible to deduct any interest payments you accrue from this line of credit as well.
What Are the Reasons to Continue Renting?
Though there are compelling arguments to purchase a house, renting could make better sense for your personal situation for the following reasons:
(1) Agile lifestyle: Renting allows you to enjoy a certain amount of freedom with your lifestyle choices. If you own a home you are by definition more tied down to a specific location, with less leeway to move across the country for an exciting new opportunity.
(2) Less responsibility: If something goes wrong or breaks, the responsibility to make fixes or repairs will not fall on you. In contrast, if you own a house you will need to pay to fix the water heater or patch a leaky roof. Beyond both routine maintenance and major fixes, if you rent you can avoid paying for homeowners insurance.
(3) Taking on debt: Purchasing a house with a mortgage represents a large debt burden, one that will take years to repay. You may not be in a suitable position to take out such a large chunk of financing.
(4) Being underwater: Though houses tend to appreciate over time, as analysts say when it comes to stocks, past performance is no guarantee of future results. There have been instances when home prices have plummeted, leaving home owners underwater (owning a mortgage that was larger than the worth of the house). By renting, you avoid this concern.
(5) Location, location, location: In many cases, renting will allow you to live in an area that you otherwise could not afford. This is especially true of urban locations and choicier neighborhoods, where homeownership could be out of your reach.
How to Decide When it Is Time to Buy?
There are a number of items to consider when determining if you should look to buy.
(1) Financial commitment: First among equals is figuring out if you are in a financial state to purchase a house. If you do not have the resources, then all the other considerations become null and void. This goes beyond the access to capital to make a down payment, but extends into your future revenues and expenses going forward. Make sure that your family can reasonably expect to have a reliable income stream in the years ahead to pay for the costs of homeownership.
(2) Readiness to put down roots: Another key factor to consider is how connected you feel to your current locale. If this is where you see yourself living for the foreseeable future, then it could very well be the right time to look to make your temporary home a permanent one.
(3) Macroconditions: It is also vital that you understand the current market. If interest rates are through the roof and home prices in your desired area are in the stratosphere, taking another year or two to rent while you continue saving up for a down payment could be a better move for you. If you wait for all the starts to align perfectly you may never find the right time to buy, but you should be aware of the market conditions and how they impact you.
(4) Your individual desire: It could also be that you truly want to own a piece of real estate, and to feel that pride of ownership that comes with being a homeowner. If that is the case–and the finances align–then this could be a strong signal that the time is right for you to stop renting and buy a home.
Conclusion: To Create a Home
Purchasing a house is likely the largest financial transaction most of us will ever be party to, and it goes without saying that the decision-making behind this determination can be complex and multifaceted. However, at the end of the day, a physical house is a means to create a warm and loving environment for yourself, your family, and your friends.
The best and most important reason to purchase a home is because it will allow you to do just that. As the modern-day philosopher Arthur Brooks has written:
“If you think the house you are considering purchasing is the best place you can find to raise your family, welcome your friends, create traditions, and provide a destination for those you love, then go ahead and make it permanent.”
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