Should I Buy or Rent a Home? Top Factors to Consider

Should you buy a home or rent? This is an important question and one with no simple answer that fits everyone. The Denver housing market is currently hot, meaning housing inventory it tight and both home prices and rents are going up. People are moving to Denver for many reasons. Between the beautiful surroundings, the influx of tech sector jobs, and lots of fun things to do, the area is attracting lots of new residents, especially young people. What are the main factors to consider when asking yourself, should I buy or rent a home?

Pros and Cons of Owning a Home

For a long time, owning a home was the American dream. For many people, it still is. However, many financial experts as well as ordinary people now question this conventional wisdom. Part of this has to do with the housing crash of 2008, but it’s more complicated than that. The fact is, owning a home is still a great choice for some. Others are better off renting, at least for the time being. What are some of the top criteria to consider regarding home ownership?

Before we look at the major pros and cons of home ownership, let’s briefly consider the idea of your home as an investment. Traditionally, families considered their home as their largest financial investment. Considering how unpredictable the housing market is, however, this isn’t always the case. Data reveals that owning a home isn’t necessarily the most profitable investment. A home is potentially a good financial investment, but you can’t assume this without considering your own situation.

Here are some of the major benefits to ownership.

• Stability and community. Owning a home gives you roots in the community. It’s a good choice for people who are fairly sure they want to live in a certain area for at least a few years, if not the rest of their lives. A related factor is the pride of ownership that many homeowners experience.
• Autonomy. This is a psychological as well as practical issue and relates stability. When you rent, your landlord is in charge. He or she has the power to raise your rent, set certain rules, and even decline to renew your lease. When you own a home, you have far greater autonomy (though you’re still subject to local zoning laws and taxes, of course).
• Financial benefits. While mortgage payments may be higher than rent, they are also more stable. If you have a fixed-rate mortgage, your payments are predictable over the long-term, which is not the case with rent. Interest and property tax part of mortgage payments may also be tax-deductible. And, you earn equity with every mortgage payment.

Of course, there’s also the other side of the coin. There are also potential drawbacks to ownership.

• Long-term commitment. While stability is a positive for many people, it also means a long-term financial commitment. In an uncertain economy, this is potentially a challenge. The worst case scenario is the danger of foreclosure, something that’s not an issue when you rent. Also keep in mind that it often takes longer than you anticipate to sell your home if you ever decide to do so.
• Up-front costs. You need more money up front to buy a home than to rent. You need a down payment as well as closing costs.
• Maintenance. When you own a home, you’re responsible for maintaining it. This entails work and/or costs. If something breaks, it’s up to you to fix it. You’re responsible for maintaining your yard, lawn, appliances, and so forth.

Pros and Cons of Renting

Most people who are debating the rent vs. buy issue already have experience with renting. However, it’s still worth noting the pros and cons of this choice and measuring them against the alternative. Let’s look first at the benefits of renting.

• Short term savings. Rent can be lower than mortgage payments. There are also rentals that include utilities, lowering your monthly bills even more.
• Flexibility. This is the flip side of stability. When you rent, you’re not committed to staying put for a long time. If you decide to change jobs or your company moves to another state, it’s not a big burden to pack up and leave.
• Less responsibility. Your landlord is responsible for maintaining your house or apartment and property. This includes landscaping, snow removal, plumbing, electric, and major appliances.

There are also some drawbacks to renting.

• Lack of stability. If you want to feel rooted and part of a community, renting isn’t the best long-term strategy.
• Financial disadvantages. You don’t get tax breaks, as with mortgage payments. Your rent is also subject to the whim of the landlord. In cities where housing is hot, rents often rise dramatically. While foreclosure isn’t an issue when you rent, there’s always the threat of eviction.
• Less privacy. If you rent an apartment, you generally have immediate neighbors. Of course, if you renting an entire house rather than an apartment, you avoid this  drawback.
• Rules. Landlords may impose certain restrictions, such as prohibiting pets.
• You’re paying down your landlord’s mortgage, instead of your own.

These pros and cons, of course, vary quite a bit depending on your particular circumstances. The real challenge is to carefully consider your finances, goals, and preferences so you find the solution that’s appropriate for you now. It’s also something to reassess every year or when something changes for anyone in your household (new job, birth of a child, child enters school, etc.).

Should I Rent or Buy?

Before answering this question, do a thorough examination of your current situation. The following are some questions to help you reach the right conclusion.

• How long do I plan to stay where I am? Nowadays, people don’t stay put as long as they used to. Unforeseen factors often cause people to move. However, it’s still useful to answer this question as best you can. In general, if you move within the next couple of years, renting is often financially better. If you stay in one spot for at least 3-5 years, the long-term financial benefits of ownership start to kick in.
• How stable is my income? Job security is never guaranteed, but it’s possible to estimate the likelihood of working at your current job or a similar one in the future. For example, if you’re a recent college graduate still searching for a good job in your chosen field, it probably makes more sense to rent until your situation is more stable. It also keeps you flexible to pursue great opportunities should they arise in other locations.
• How much cash can I raise? Before you seriously consider buying a home, make sure you can comfortably raise the money for a down payment and closing costs. If this is a serious challenge, you can always rent and work towards saving money for buying a home later on.
• Am I ready for the responsibilities of ownership? This really depends on your personality, preferences, and current situation. If you enjoy maintaining your own house and property, you probably want to own your own home at some point. If, on the other hand, you prefer a low-maintenance and flexible lifestyle, renting leaves you freer.

These are some of the questions to ask yourself before deciding whether home ownership or renting is right for you. Keep in mind that your answers are likely to change over time. Because ownership involves a longer commitment than renting, it’s especially important to make sure you’re ready before purchasing a home.

If you want to discuss home ownership versus renting in more depth and specific to your situation, please contact me and I would be happy to help you understand your options.

Use the mortgage calculator to estimate your loan cost (principal and interest only, you will need to increase for taxes and insurance). And download and print the PDF below that further speaks to owning versus renting a home.

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