The Home of Your Dreams: Renting vs. Buying - Part I

Written by Monica Sandler

Wednesday, 07 January 2009 03:36

Buying a home has been the American dream for generations. But is renting always a poor option? That depends upon your financial situation and lifestyle choices. For instance, if you don't relish the thought of shoveling the walkway or having to a septic system flushed, then renting might fit your lifestyle. However, the financial benefits to owning a home over the long run are considerable.

How does renting compare to buying? Here are some major differences:

1) Payments - Whether you buy or rent, you'll make payments to someone. Fixed rate mortgages allow you to lock in the payment amount for a significant length of time (e.g. 30 years). But costs such as taxes, insurance and maintenance can add thousands to home ownership over time. Rent payments typically don't remain constant, and can increase as soon as the initial lease expires. When you own, mortgage interest is tax-deductible whereas rental costs are not. (There are some states which have rental rebate programs.) An advantage to paying a mortgage is that, as you pay down the loan, the equity (ownership) you have in the property increases.

2) Up Front Costs - When you finance a home purchase, you'll typically need to contribute 5%-20% of the price as a down payment at the time you close the deal. On the other hand, a renter must commit a security deposit (usually one month's rent payment). Although there are some financing companies that will lend a portion of the down payment, a home buyer will still generally be responsible for closing costs, taxes, fees and some of the down payment.

3) Taxes - Property taxes are the homeowner's responsibility. Taxes can (and usually do) increase over time, so the cost of owning a home can increase sharply - especially if the community is growing. Some rental agreements require an increase in rent relative to any tax increases; therefore, even renters cannot always escape the tax man. But when you rent, you owe only the rental payment.

4) Insurance - Homeowner's must purchase insurance when financing a property. Coverage costs vary depending upon the value of the home and its contents. There are renter's policies as well which just cover the renter's personal property. Renter's premium payments are usually much cheaper.

5) Property maintenance - One of the biggest differences between renting and owning a home is the obligation to maintain and repair the property. Except for shared properties (such as condominiums), the homeowner is responsible for the appearance, structure and working order of the property. Most states recognize that the landlord must maintain a habitable property, but small repairs can sometimes require patience due to inattentive owners. Some rental agreements (typically for a single-family home) may require the renter to perform duties such as waste disposal and lawn care. Maintenance expenses usually rise over time, adding to the cost of ownership.

6) Value - The biggest benefit to owning a home is that the value of the property you are living in usually goes up over time. Even though the real estate market moves in cycles, a home is usually worth more by the time the mortgage is paid off. If you combine the increase in equity and the increase in the value of a home, ownership can be financially rewarding in the long run. Keep in mind that the additional costs of ownership (maintenance, taxes, etc.) can erode the true increase in value.