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Monday, October 20, 2014

109. Pros and Cons of Home Ownership Vs Renting

Home ownership. It’s not for everyone. Yet it’s part of the “American Dream” to own your own house, have a white picket fence, 2.2 kids, and a dog (or cat).

So what are the pros and cons of owning a home? What are the pros and cons of renting a house or apartment? 

A. Let’s talk for a minute about home ownership.

1. Some of the advantages of owning a home include:

Home equity. This is probably one of the most attractive features of buying a house. as the mortgage balance decreases and equity build over time you own a larger portion of your house.

Homes typically increase in value over the years. A home is an increasing asset. Meaning over the life time of the asset you can expect it to be worth more 10, 20, or 30 years after you purchase it.

Added privacy. There’s typically not as many noisy neighbors blasting music until 3am or having yelling matches right above (or below you).

Interest and property taxes are tax deductible. The portion of the mortgage payment that includes interest and property taxes can be deducted from your income during tax season.

There a sense of community in home ownership. There’s community activities or outreaches. There’s knowing your neighbors and even having them over for meals or play dates.

Mortgage payments typically stay the same throughout the years. While rent can go up your mortgage payment stays the same.

Mortgage payments can often be similar in costs to monthly rent. Particularly the longer you rent the higher your monthly rent becomes. This means that instead of giving some corporation or individual your money you are actually building wealth with home ownership.

There are more decoration and remodeling options. As a home owner you are free to decorate and remodel your house to suit your needs or desires.

2. On the other hand some of the disadvantages include:

Buying a home is a long-term commitment. It can be accomplished in as few as a couple years but most people typically take at least a decade to three decades to purchase a home.

As a homeowner you are responsible for maintenance and upkeep. This means if the toilette floods, the roof or fence needs repairs, or if an appliance breaks down buying or repairing the said item. If the AC or heating unit breaks down that is also a serious added expense.

Home ownership means less mobility. It is more difficult to pick up and leave when you own a home. It typically involves selling or renting out your home to someone else.

Buying a house typically requires a down payment, closing costs, and moving expenses. Closing costs can be negotiated. On the other hand putting 20% down on a house means you avoid private mortgage insurance (PMI). Plus you aren’t just throwing that money away you actually own a portion of your home. Expect, like with any move, a couple thousand to several thousand dollars on moving expenses.

The value of your house may not increase for the first few years of ownership. In some cases, like in the housing bubble burst of 2008, your house make actually be worth less than what you owe on it.

If you get behind on your payments the bank or lending organization can actually take your home from you. Remember a mortgage is a loan. As such if you get behind on your loan they can seize the asset – in this case your home. Having an emergency fund set up with 6-12 months of expenses is typically a good idea for a home owner.

B. Let’s switch gears a minute and talk about renting.

3. Some of the advantages of renting are:

Renting a house or apartment can be cheaper than buying a house. Rent can cover utilities, which can add up to a significant cost savings. Often, renting a house is cheaper than buying a house.

There is more flexibility in moving. When renting a house or apartment the lease is typically for 6 or 12 months. This means if you move around because of job opportunities frequently this option may be good for you. Don’t like the location or people you live around? No problem. If you end up not liking the neighborhood simply wait till the lease expires and find another place to live. 

Typically less maintenance or upkeep. This typically means major repairs such as roof, AC/heating, fence, etc. are done by the landlord. In an apartment complex often you don’t have to worry about appliances breaking down or mowing the yard for example too.

There are typically some nice perks associated with rented houses or apartments. These can include swimming pools, community centers, parks, gyms, etc.

4. Some of the disadvantages of renting are:

Your rent isn’t fixed long-term. You can expect the rent to go up each year you live in a given house or apartment. After a few years your monthly rent may actually be greater than the market value of a home mortgage.

By paying rent you aren’t building equity. You have no ownership on the house or apartment you rent.

Limited personalization. When renting you are typically limited in how you change the aesthetics or the basic layout of your rented house or apartment.

There are limitations to owning pets, making noise, owning a garden, etc. If you own a pet in a house or apartment you typically have to put a deposit down to pay for potential damages caused by pets. There are limitations to noise that you can make in rented apartments and houses. This limitations aren’t always enforced but they do exists nonetheless. And planting your own trees, flowers, or vegetables is typically limited in a renting situation. 

Buying a home is not the right answer for everyone in every situation. Not having a sizable emergency fund as a homeowner can mean facing serious financial hardship. If someone is constantly moving then renting may be a better option.

What is right for you and your family? Are you currently renting or buying your home? 

See also this post on the NY Times showing an example of the difference in renting or buying. 


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