When you need a place to live, you have two primary options: You can choose to rent or you can choose to buy.
Both the renting and buying experiences are unique, and each presents its own benefits. But a closer look at buying a home rather than renting unveils a series of advantages that can have a long-term impact on your financial health.
Here’s a look at 6 of the benefits you unlock when you choose to buy a home rather than rent.
1. Equity
There’s one huge differentiator between owning and renting, and it can be summed up in a single word: equity.
Equity is the difference between an asset’s value and how much is owed against that asset. For example, if you have $150,000 left on a mortgage for a home that you could sell for $250,000, you have roughly $100,000 in equity.
Your monthly obligation on a home you own includes four major parts: principal (the amount that pays down your loan), interest (the cost of your loan), taxes (property taxes owed to the government) and insurance (a homeowners policy that protects your home).
The principal portion of your monthly obligation is like money in the bank. Assuming your home maintains its value, you get that principal back at resale.
That’s not the case with leasing. When you rent, you pay a monthly amount – and you will never get it back again.
2. Savings
Here’s a fact that may surprise both buyers and renters: It’s cheaper to buy, even without taking equity into account.
A recent study found that only in Colorado, Hawaii, Idaho, Montana and Utah is it more expensive to buy than to rent. In nine other states, the costs associated with buying and renting are roughly the same. And in the other 36 states, buyers actually enjoy additional savings over renting.
A primary reason why buying is so affordable right now is the ongoing availability of low-interest loans. Yes, interest rates could go up in the future – they certainly can’t go down much further. And, yes, you may be able to find a unique steal of a deal on the rental market in your area.
But, generally speaking, you’re more likely to enjoy housing-related savings by owning rather than renting in most parts of the country.
3. Taxes
Home ownership has always been a part of the American dream, and our tax system is set up to reward those who own rather than rent.
For example, when you own a home, the interest you pay on a mortgage loan is tax deductible in most cases. Also, any private mortgage insurance you’re required to pay (mostly in cases where the initial down payment was less than 20%) is also tax deductible.
Also, your property taxes are fully deductible from your income. Remember how the monthly amount you pay toward principal creates immediate equity? Two other big portions of your monthly obligation (interest and taxes) also deliver important benefits.
When you rent rather than buy, you’re locked out from these benefits.
4. Credit
Your ability to take out credit and to enjoy low interest rates is a function of your credit score. And nothing looks better to credit scoring companies than a mortgage loan that gets paid on time each month.
Why do credit scorers love mortgage loans? Two main reasons: 1) They prefer installment debt (like a mortgage) over revolving debt (like a credit card), and 2) They love individuals with lengthy credit histories, and mortgage loans are typically at least 15 years in length.
The key is to make your payments on time, though. You can get a significant credit boost when you pay your mortgage on time each month, but you can also be penalized for falling behind – just like on any other debt obligation.
5. Customization
Imagine you just got married, and one of the first things you and your spouse do is get a Labrador Retriever. The dog is beautiful, and you both love it.
But then you start looking for homes to rent – and you find that you’ve significantly narrowed your options.
Landlords often don’t want to deal with dogs and other pets. They don’t want you to paint the walls. They don’t want you to turn a portion of the yard into a vegetable garden. And they won’t let you up and leave until your lease agreement has expired.
When you own your home, you can customize the experience you’ve always wanted. Get a dog (or two) if you want. Paint those walls. Plant your vegetable garden. And put your home on the market to sell anytime you want.
6. Certainty
Saving the best for last: When you buy your home, you get certainty that you won’t find on the rental market. As soon as you sign a mortgage agreement, you can rest assured that your principal and interest will remain the exact same (assuming a fixed rate rather than an ARM) for the length of that agreement – which is typically 15 to 30 years.
Your property taxes are likely to go up, though many states have in place restrictions on just how much taxes can go up on a single property under one owner. And your insurance may go up, too.
But you have the peace of mind that comes with a signed and unshakeable mortgage agreement for the long-term. When you rent, you may find that your landlord raises your monthly payment each year – or that you get kicked out at the end of your lease agreement with no explanation.
Choose the Power of Purchasing a Home
Is buying always the right decision? Not necessarily. There are cases where you need a temporary place to stay, and there are situations in which you need time to save up for a down payment and go through the home-purchase process the way you would like.
But there’s power in purchasing a home, and the many benefits of home ownership far outweigh the few benefits of renting.
Are you interested in learning more about the benefits of home ownership? I’m always glad to talk to you about buying a home or to answer any questions you have. Get in touch any time at pthessen1@gmail.com.
-submitted by Perry Thessen
