Should you rent or buy a home?

So you want to know which is a better deal: Buying a home or renting one.

Well, there's a welter of information you need to absorb if you want an answer to that question. In the broadest terms, if you can afford to buy, go ahead and plunk the money down. It's generally better to buy a home than to rent – for many people, most of the time. But there are many factors that go into this decision.

That's where we come in – HomeRentals.com is here to help you make an informed choice. After all, where you live is one of the biggest decisions you'll ever make, and the more information you're armed with the better.

why to buy and why to rent – An Overview

Here are some quick rules of thumb. You should usually buy instead of rent – except when one or more of the following conditions apply:

• You intend to move in the near future
• Your rent is where it needs to be (2/3 or less of what your total monthly payments would be for buying a house)
• You don't expect to be around for more than, say, 15 years

Is renting "Throwing money down the drain"?

A big myth is that it's better to buy because when you own the home you're not "throwing your money down the drain” on rent. But there are many things to keep in mind. Like renters, home buyers still “throw money away” on things that don't build equity. These types of expenditures include the following:

• Closing costs
• Interest on your mortgage
• Property taxes
• Property Insurance
• Private Mortgage Insurance (if your down payment is less than 20%)
• Maintenance (you usually have to pay this as protection for the bank)

Surprisingly these "throwaway" expenses are more than you'd likely spend if you were merely renting. However, if the only financial advantage to buying a home was building equity, it wouldn't be enough to offset these expenses. Under such conditions, clearly it would be better to rent.

The reason buying is usually better than renting is not because you avoid throwing money away, it's because of a number of other benefits:

• You lock in your monthly payment for 15 or 30 years
• Your house gets more valuable over time
• You can stop making payments when the loan is paid off
• You can deduct mortgage interest on your income taxes

These same monthly payments are where the real benefit lies. If these advantages didn't exist, the equation would change for many people, and it would make more sense for them to rent. But in fact they do exist – and so the proposition of home-buying becomes worthwhile for many aspiring home owners.

So let's discuss the reasons you might consider renting or buying in greater detail.

Reasons to rent

Simplicity

Is there anything simpler than just making your monthly payment and not having to worry about taxes, utilities (at least some of them), maintenance, mowing the lawn, and fixing that leaky faucet? As a renter, you can concentrate on other things. Most home owners don’t realize how much money they spend just on property upkeep. Renters are spared this burden.

You can invest right away

The ability to start investing right away, without having to save for a down payment on a house, is another great reason that renting might be perfect for you. You can put the money that you'd otherwise sock away for the big down payment to work for you right from the get-go, in any number of ways. We're not talking chump change; most banks reqire 20 perecent of the loan from you as a down payment. That can represent several years’ worth of savings for a family just starting out.

Renters can build equity too – just not in a home. You simply invest in something else, such as a mutual fund or your own business, if you're so inclined. If you can invest $525 per month and earn 6-percent on it after taxes, after 30 years you'll be in about the same position as someone who bought a house that could have been in your price range.

Let’s pick up and go

So one day you decide you’re sick and tired of Seattle’s 9-months of rain and you want to move the whole gang down to the sunny beaches of Florida. It's much easier to move if you get tired of the same old same old location you've been living in, if you only have a lease to worry about. Granted, there are few strings for you to deal with. You might have to work something out with the lease holder if you plan to move out early – but you can probably sublet the place or find a new tenant.

If you have to sell a house to move, things are entirely more complicated. What kind of market are you selling your home in? Is it a down market or an up one? What's the differential in home prices between where you are now and where you want to go? If you need to sell your existing home to put down money on a new one in a pricier market, you're losing buying power.

No cost or effort spent on maintenance

If your rent is low enough, this could be a better investment than house-buying.

Reasons to buy

Pride and comfort in owning your own home

When you buy your home you can customize it to your heart's content – that's something you'll never be able to do as a renter. You can paint the rooms how you like; you can swap out old appliances for new, you can take out a wall where you think you want a new hallway. You can add on – or take off. Put a garage on or even another addition. You can do anything you want because it's your home! Now isn’t that nice?

It’s like paying yourself

Money that you pay towards the principal on your loan each month increases the percentage of your home that you own. In effect, you're paying yourself – and you can tap into that money when you need to. Once you build up equity, you can take out a home equity loan – money you borrow backed up by the value of that portion of the house which you own. You can’t do that when you rent.

Same payment

If you rent for 30 years, your rent will probably go up at least 15 times. Now if you buy, your mortgage payment stays the same over 30 years. This is, in our opinion, the biggest motivating factor to buying a home. Now, keep in mind you'll have other expenses that never go away – like property, school and local taxes. You'll also have to deal with escalating home improvement and home maintenance costs. But, overall, that mortgage payment stays the same, while the value of your home increases. Your money is working for you – and it's tough to beat that benefit.

Tax Deductions

Nobody likes to fork over money to Uncle Sam unless they have to. Uncle Sam makes it a little easier for buyers. The idea is to promote home ownership and a prosperous middle class – which many consider the cornerstone of our great nation. What does this mean to you? You get to itemize your deductions – or have your tax preparer do it for you.

This is to say you can deduct the interest you pay on your mortgage. Here's where you get another really good break: you leverage your investment by buying the home with the bank's money (or a great deal of the bank’s money). You might put only 10-percent down, but the whole house – every board, nail, shingle, window, door, etc. –is highly likely to appreciate every year. Say you put $20,000 down on a $200,000 house, the whole $200,000 appreciates – not just your down-payment. Now that's a smart investment.

No income tax on selling your home

If you ever decide to sell your castle, Uncle Sam cuts you a big break by allowing you to keep the proceeds from the sale – tax free. Can you believe that? Sam's okay with letting you walk away with all the money you made. That doesn’t happen too often. And it's not chump change either.

Imagine you decide to sell your house 20 years after you bought it. Let's also say you'll pocket about $40,000 in doing so. Would you like to pay taxes on that $40,000?

The choice is up to you

Ultimately whether it's a good idea to buy or rent a home is up to you. Only you can seriously assess your financial resources for buying and evaluating your long-term plans for living in one area. If you want to move in less than 3 years, renting is probably a strong option for you. If you're committed to being in the community and possibly upgrading down the road – then owning a home will continue to be a great value.

There's no getting away from the pros and cons to each decision you make. Only you can determine what trumps what. What is it that you value most highly? Convenience? Equity? Freedom? Security?

Before you buy that fixer-upper, that mansion on the lake, or lease that little cottage that catches your fancy, do the homework and make a wise decision. Good luck from us here at HomeRentals.com.

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