To rent or to buy? Why buying a home isn't always the best choice.
You have saved enough money for a down payment for a house and know that you can afford to buy. Is this the best use of your money? 聽In addition to looking at the hard numbers, you need to examine your feelings about home ownership. 聽There are plenty of online 鈥渞ent vs buy鈥� calculators. 聽What follows is a discussion of the pros and cons of buying a home to help you in your decision.
Renting 鈥� Pros and Cons
As a renter you have the flexibility to move whenever you want. 聽In addition, someone else is responsible for the upkeep and repairs. 聽To quote Ralph Waldo Emerson, 鈥淎 man builds a fine house; and now he has a master, and a task for life; he is to furnish, watch, show it, and keep it in repair, the rest of his days.鈥�
One downside of renting is that you are not building equity in a home. 聽 In retirement, you will face the continuing expense of paying rent. 聽In addition, you do not have control of your living situation should the landlord raise the rent or decide to sell.
Ownership 鈥� Pros and Cons
Here is George Clooney鈥檚 take on ownership: 聽鈥漌e rented homes growing up. 聽I went to five schools before I was in eighth grade. 聽鈥� And鈥o, it鈥檚 one of those things that was always聽to me, it was a sign of making it was being able to own your own home.鈥� 聽(And no, I did not have an opportunity to interview George Clooney myself).
Speaking from personal experience, there is something ineffable about owning a home. 聽Like Clooney, I moved extensively growing up because my father was in the Air Force. 聽Not only did we not own a home, we did not have furniture. 聽As we moved from base to base, living quarters had the basics and we just moved with our clothing and personal items. 聽Owning a condo provides me with a sense of stability. 聽Other more tangible benefits of ownership include a control over one鈥檚 expenses, building equity over time, tax breaks (mortgage interest and property tax are deductible) and the prospect of minimal housing costs in retirement once the mortgage is paid off.
One down side of home ownership: 聽have you noticed the similarity between the words 鈥渙wning鈥� and 鈥渙wing鈥�? 聽If you take out a 30 year-mortgage for聽$500,000 at an interest rate of 4.5%, you will pay close to $412,000 in interest (this is not counting the deduction for mortgage interest). 聽In addition to the mortgage, you will have property tax, homeowner鈥檚 insurance and the cost and responsibility of maintaining your home. 聽Imagine coming home from a trip to a message from your downstairs neighbors that their bathroom ceiling is collapsing because of your leaky toilet! 聽(This happened to me). 聽Another potential negative: if you lose your job, you are still help responsible for mortgage payments.
鈥淩ent vs Buy鈥� Calculation
The discussion so far has been qualitative. 聽You can also take a quantitative approach using one of the many available聽online calculators. 聽Here are some of the factors to consider:
1. Purchase price of home vs. cost of renting comparable property in your geographical area. 聽If it is much cheaper to rent than buy, it might make financial sense to rent.
2. 聽The length of time you will be living in the area. 聽If you plan to live in an area for only several years, it will be difficult to recoup closing costs (from purchase) and commissions (from subsequent sale).
3. 聽Your marginal tax bracket. 聽The higher your tax bracket, the greater the deduction for mortgage interest and property tax (and savings on the cost of聽homeownership).
The Bottom Line: 聽Whether to buy or rent is a complex decision. 聽Another interesting read is a聽column聽in The Motley Fool, which discusses data from the Federal Reserve Board鈥檚 Survey of Consumer Finances on relative net worth of homeowners vs renters.
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