Are You a Renter … or a Buyer?
Homeownership has long been part and parcel of “The American Dream.” Homes have a long and successful track record as a store of value and wealth for American families for generations. It’s also been referred to as an excellent investment and a forced savings plan.
This may be true, but there is something else to consider: homeownership is not the right decision for everyone. In fact, a 2010 survey by the National Apartment Association found that 76% of renters have no plans to purchase a home. This is a powerful statistic, given that this survey was taken in an environment of low mortgage loan rates and motivated sellers.
The Perks of Homeownership
Homeownership allows you to build up equity in your home over the years, as your home value appreciates and as you pay down the mortgage balance. This equity may help you qualify for a loan in the future, if you need it. It may also give you something of value to pass on to your heirs.
Homeownership also allows you to take advantage of leverage—meaning you can take ownership of a large asset while putting up comparatively little of your own money. For those who qualify for a VA loan, you can even buy a home with no down payment.
You may have heard about potential tax benefits for homeowners. As a homeowner, you’ll be able to deduct all interest paid on your home loan (and other fees incurred during the year you buy your home) from your tax return. If you used a home equity loan to repair or upgrade your residence, the interest on that can also be a tax deduction. (Talk to your tax advisor for details.) In addition to that, the real estate taxes on the home you live in and a vacation home are fully deductible.
But homeownership has advantages that go beyond the financial realm. When you own your own home, it’s yours. Yours to decorate any way you like, yours to invite friends and family over to for the holidays, and yours to build generations of memories. Homeownership means setting down roots, and there’s a certain security in living in a home that you own.
With a rental, there’s always the chance that a landlord will decide to raise your rent, remodel, sell the property, or ask you to leave for any other reason. When you own a home, on the other hand, your rent will never go up. Although your payments could go up if you choose an adjustable rate mortgage and interest rates rise, and your property taxes could also go up.
The Drawbacks of Homeownership
With opportunity comes responsibility. If you own your home, you are also solely responsible for your own maintenance and repair. Heat not working? Leaky faucets? Snow and ice on the sidewalk? You don’t have a landlord to call anymore. It’s all up to you. When you’re renting, you have a certain level of freedom and fewer responsibilities.
Also, keep in mind that leverage works both ways: When you purchase an asset with borrowed money, you own 100% of the gains, but you also own 100% of the losses too. In some cases, if the value of your home declines for a period of time, you could lose more than you have paid into it—at least temporarily. You could also temporarily owe more on the home than the home is worth—a condition known as “being upside-down” on your mortgage. Over time, this situation corrects itself as you pay down your mortgage balance. But it could be a problem if you need to relocate sooner than expected.
Relocation is much easier for renters than buyers. As a renter, if you decide to move, for whatever reason, it involves nothing more than giving notice to your landlord and packing your bags. Once you own a home, relocating means either selling your home or renting it to someone else, neither of which is easy or hassle-free. If you are not planning to be in the area for more than a few years, you may be better off renting and saving your money.
Making the Call
Whether you choose to buy or rent your home depends not only on the numbers, but also on your life situation and your personal preferences. You may find that you’re really a homeowner at heart, but need a year or two to prepare to buy your first home. Perhaps after crunching the numbers, you may decide that you like the lifestyle of a renter and haven’t the means or intentions to buy in the foreseeable future.
If you’re not interested in or ready for buying right now, honor your individual needs. While some people consider renting to be “throwing money away,” it really isn’t. Your rental payments cover the basic human need for housing without the change in lifestyle you may not be prepared for. It is no more of a waste of money than paying for food.
If you’ve made the decision that you DO want to buy a home, your next step is deciding how much you can comfortably afford. Here’s how.
Use the following questions as a guide to determine if homeownership is right for YOU:
- Do I view the responsibility for maintenance problems like plumbing and roofing as something that comes with homeownership, and even if I’m not excited about it, I’m ready to do it?
- Does the thought of being responsible for the maintenance and upkeep of the interior and exterior of a home sound exciting or at least not too overwhelming?
- Can I afford to pay for a substantial emergency repair with little or no notice?
- Am I comfortable taking on debt? (While a mortgage is “good debt,” if the thought of owing upwards of $100,000 makes you uncomfortable, really consider this one.)
- Will I be living in the home for at least a few years?
- Can I find someone trustworthy to watch the house if I need to leave town?
- Is my source of income reasonably stable and reliable?
- Is the ability to remodel and/or redecorate my living space any way I like it important to me?
- Do I want the security that comes with owning a home?
- Does homeownership mean a lot to me and my family?
If you answered “yes” to seven or more of the above questions, you may be ready to make the transition to homeownership.