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This is a guest post by Jasper L. Stojanovski from Stojfinance.com. Jasper is a 19 years old man with a passion for investing that hopes to pursue a career in finance. I am very happy to have him contribute to this blog.
Are you moving out of your home and cannot decide whether to buy or rent?
Many people prefer owning a home. However, financially, this might not be an option for you now. In this post, I will explore the pros and cons of each, so you can decide what is best for you. But before I begin, you will need to answer a few questions:
- How long do you plan to live here?
- What is the price of housing in your area?
- Do you have any savings?
- Do you have a good credit rating?
- Can you afford to perform regular maintenance?
Once you will have the answers to this question, you will be ready to consider whether you should buy your home or rent your home.
Buying a House – Advantages
Purchasing a home is a significant decision for anyone, especially a first home buyer. I will now explore some of the advantages of buying a house.
1. Avoiding inflation
You can avoid inflating house prices if you buy now. Essentially, if houses in your area are appreciating, you may not be able to afford the same house in five years, after inflation. You can avoid this expense if you buy now. In this case, buying is advantageous, assuming you plan to live in your house for at least 5-7 years.
2. You Own the Home
This is an obvious one but it should not be skipped. You cannot be evicted when owning a home unless you are not able to regularly make your loan repayments. There are many circumstances whereby a landlord can evict their tenant, as I will explore further in the renting section.
3. Homes Generally Increase in Price
As mentioned above, houses typically appreciate over time. Meaning you will be able to sell for a profit later down the track, whether you want to upgrade, or for other reasons.
Let’s assume you bought your house for $200,000. In 10 years, growing 3% annually, your house will be worth $268,783. After 20 years, the power of compound interest will be more clear-cut, and your house will now be worth $361,222 not bad!
4. Mortgage Interest Tax Deduction
Depending on your location, and the price of your house, the interest you pay on your mortgage may be tax-deductible. However, in 2018, the criteria allowing you to claim your mortgage interest on tax has been changed. It is important that you are aware of this change before purchasing a house in the US.
For more information on the Tax Cuts and Jobs Act, you can read this article on The Motley Fool. They published an article full of helpful information regarding mortgage tax deductions in 2018, in the US.
Buying a House – Disadvantages
Purchasing a home does not come without its disadvantages, as you will find out below.
1. Price May Fall
There is always the potential for your house to drop in value. Meaning you would have been better off renting, thus avoiding the loss. However, houses typically rise in price over the long-term. According to this logic, any losses will likely be reversed in the future.
2. Requires Substantial Capital
Generally, you need to spend hundreds of thousands of dollars to buy a house. Not only is a house expensive. But you also need to make a 6% down payment when securing a loan for a house. A down payment is a payment used in the context of the purchase of expensive items such as a car and a house, whereby the payment is the part of the total amount and is usually given in cash at the time of finalizing the transaction. For example, if you were buying a $200,000 house and were required to make a 6% down payment, this would equate to $12,000.
3. You Are Responsible for Upkeep
Performing general maintenance is part of owning a house, general home maintenance may include: testing your carbon dioxide detectors, getting your air conditioner serviced, inspecting your roof for damage, leaks and other common issues. These are among the many tasks required of you when owning a home. On the other hand, your landlord will carry out these tasks when renting.
Renting a House – Advantages
Renting a house also have some advantages.
1. Minimal upfront costs
There are minimal upfront costs associated with renting. Therefore, will have a place to live without the headache of pulling out a mortgage, organizing a builder and so on.
2. You Are Not Tied Down
In the US, you typically need to give the landlord one or two months notice before vacating. However, when owning a house, assuming you want to move out or otherwise relocate, you will probably have to sell your house.
This means you will have to find a real estate agent, clean the house from top to bottom, and undertake other time-consuming tasks.
3. No Closing Costs
As a tenant, you do not need to pay the closing costs associated with buying a house. The closing costs for home-buyers in the US are typically two to five percent of the price of the house and include inspection fees, appraisal fees, lender’s title insurance, underwriting fees and more. It is important to consider these costs when making a final decision.
Renting a House – Disadvantages
Here are some of the disadvantages of renting a house.
1. Landlord Can Sell the Property or Raise Rent
The landlord might decide that it is more profitable to sell the house, rather than rent it out to you. Contrarily, they may decide to simply raise the rent to increase their cash-flow. Either way, this is bad for you. And this is something you must consider before renting a house.
2. No Tax Benefits
As mentioned above, you are typically able to claim mortgage interest on tax when purchasing a house. However, when renting, you are not eligible for these benefits. You are simply paying to live in someone’s house.
3. Choices May Be Limited
There is more freedom associated with the purchase of a home. You decide where to buy land to build or browse around and see what houses are available for purchase. When renting, you will simply have to find a place to live, and do not have these privileges. You may even need to share a house with other tenants if you cannot find another place to rent.
As you can see, there are some strong arguments in favor of each of these options. It is not an easy choice. In the end, it all comes down to what is right for you. Below is a summary of the advantages and disadvantages of each. Using this information, I hope you can make a more informed decision about buying or renting a house.
Advantages of Buying:
- Avoiding inflation
- You Own the Home
- Homes Generally Increase in Price
- Mortgage Interest Tax Deduction
Disadvantages of Buying:
- Price May Fall
- Requires Substantial Capital
- You Are Responsible for Upkeep
Advantages of Renting:
- Minimal upfront costs
- You are not Tied Down
- No Closing Costs
Disadvantages of Renting:
- Landlord Can Sell the Property or Raise Rent
- No Tax Benefits
- Choices May Be Limited
What do you think? Do you prefer owning your home or renting it?