Renting VS. Buying a Home: Which is Better?

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“A funny thing happens in real estate. When it comes back, it comes back like gangbusters”

– Barbara Corcoran

With people’s busy and hectic schedules in this fast-paced world, it is all too easy to take for granted or overlook some rather important decisions. Among these is the decision of choosing whether to rent or buy a home.The issue of renting versus buying a home has long been the subject of debate. Picking one of the two is a tough choice that you cannot simply ponder on overnight. However, it all comes down to your own personal situation.

The Benefits of Renting a Home

There are people who prefer to rent a house for good reasons. In fact, renting is a more feasible option, especially for those who are always on the move and people who need to relocate because of their jobs and must stay mobile. It is also a better choice for those who have recently moved out of their house with low income and no credit. In any of such situations, renting is no doubt a good option.

Renting gives people who have to stay mobile the chance to do exactly just that. These are people who go month by month and have no commitments anywhere. Aside from that, renting requires minimal paperwork as compared to that of buying and selling a house. Individuals and families with no credit scores and low income might also prefer renting. It can be very difficult to search for a mortgage when you have low credit scores and even if you do find one, you will have to deal with unreasonable interest rates, not to mention that it might be hard to make the monthly payments.

Even for individuals who make very good money will sometimes find that renting is more suitable. For instance, consider a physician couple starting residency training for their desired specialties. If they buy a $300,000 home at the start of their training and then must move for employment 4 years later the equity they acquired might not outweigh the fees. Or it may not even have kept up with inflation and the market can swing drastically either direction in 4 years and I sure wouldn’t want to risk my early savings all in one asset class.

Buying a home typically costs 5% of the value of the home and selling costs around 10% from realtor and closing fees. Say the market was freakishly stable and the home was sold for $300,000 at a so called zero loss and this is also assuming the house can be sold at this time. The cost of just buying and selling would be $45,000 dollars over 4 years.

“The best real-estate investments with the highest yields are in working

class neighborhoods, because fancy properties are overpriced”

– Jane Bryant Quinn

The Benefits of Buying a Home

On the other hand, buying a house often has benefits that far outweigh the perks of renting for many. Sure, there are tons of paperwork required here and a house purchase requires commitment. However, in the long run, you will realize many advantageous related to taxes and stability. Any interest paid on a mortgage is deductible and currently the interest rates are so low that many people are choosing to invest additional money instead of making more payments. Due to this the returns in the market are exceeding that of the low interest rates for home ownership.

The secret here is home equity. When you speak of equity, this is basically the value of a home. The equity almost always increases in time and at times, this takes huge leaps depending on the economic condition. The huge spikes can dramatically increase the value of a house and leave its owner with lots of money that is always available at their disposal. Equity also allows homeowners to apply for home equity loans or lines of credit. These are based on their house’s value and usually have reasonable rates of interest. The interest on these loans can also be deductible and the low rates serve as good leveraging for individuals like real estate investors to buy additional properties.

But then again, it will still depend on one’s ability to buy. A significant amount of savings, good income and good credit score are all important. A good credit score will allow a person to enjoy lower interest rates on a mortgage, while a good amount of savings will ensure a higher down payment, which would eliminate the need for costly mortgage insurance required by many lenders. Meanwhile, a good and steady income guarantees that a person will be able to make the necessary payments. If all these are available and you are not likely to move any time soon, buying is highly recommended.

The Bottom Line

Renting and buying a home has their own set of pros and cons. At the end of the day, it will depend on you, your needs and your capacity to choose which one of the two suits you best. In closing I will caution you to not look at buying a home as an investment but as a liability. A house costs you money and does not make you money.

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