Buying a Home Versus Renting: Weighing All the Factors -

Which is the better financial move: Owning a home or renting one? To a large extent, the answer depends on your location, the market environment, your family situation and your lifestyle preferences. Because paying for a place to live is most people’s biggest lifetime expense, weighing the options is critical to your financial well-being. While buying is undeniably an investment, it’s a far different kind of investment than buying stocks or bonds, which are optional. Everyone needs a place to live. Perhaps the best financial reason to buy is that it enables you to gradually acquire ownership, or equity. Renting has the serious downside of not acquiring equity, so renters never end up owning and must continue to pay rent, perhaps for their entire lives. Yet, if people rent at low enough costs, they may have money left over to invest and make up for their lack of home equity — if they have the discipline to put money aside. Also, owners generally qualify for a tax deduction on mortgage interest. As this deduction lowers average monthly costs of ownership, it can enable people to own more house than they could afford to rent. Yet the costs of owning, aside from the down payment and monthly mortgage payments, can mount up from property taxes, insurance premiums and maintenance. A big potential upside of owning is appreciation — the rise in house’s value over time. Contrary to the common misconception that all homes sell for more than the purchase price after a long period, depending on when you buy and sell and the conditions of your local market, there might not be much real appreciation, even over long time spans. According to the Case-Shiller index of home values, from the mid-1950s to the mid-1990s, average values nationwide didn’t really appreciate at all, when adjusted for inflation. (In between, there were ups and downs that presented advantageous times to buy or sell, but it’s hard to predict when these periods will occur.) And nationwide averages still haven’t come back to their values at the 2006 peak, before the financial crisis of 2008 took its toll. These are national figures. As values vary widely across the country — there’s an old adage that all real estate value issues are local — Case-Shiller publishes indexes specific to various markets around the country. Cost comparisons on renting versus buying vary significantly around the country, depending on local real estate values and the supply of rental housing. If the supply is sparse enough, this can push up rents to the point where buying is clearly the better move. Even if there’s an ample supply of rentals at reasonable prices, home price appreciation can push up rents over time. When you buy, you can lock in a mortgage payment for 15 to 30 years and ultimately benefit from appreciation rather than suffering from it as a renter who must pay escalating monthly costs. Even if you can rent a house now for a substantially lower monthly payment than what you’d pay on a mortgage for a comparable dwelling, gradual appreciation can mean that years down the road, your monthly rent could easily be so much higher than your mortgage payment would have been and you could still have had plenty of money left over to pay taxes, insurance and upkeep if you had bought. And by buying, you’d be acquiring equity to boot. Another big factor is mortgage interest rates. If you buy during a period of low rates, this means lower monthly payments.

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