It wasn't too long ago that I was looking for a place of my own. I was very serious about it and thoroughly enjoyed my quest for the perfect pad. Of course, I decided to fully analyze my financial situation beforehand. The very first question that came to mind was, "Should I buy or rent?"
I came to the conclusion that if I could buy someone else a house -- my rent would literally pay for their mortgage -- then I could buy one for myself. Why should I shell out big bucks to be left with nothing in the end?
But before making a final decision, I decided to look at both sides of the coin. After all, there are a lot of people who choose to rent rather than purchase a home.
factors to consider
Here are some of the main factors that should be considered before deciding whether to buy or rent.Location
You have to decide where you plan on living over the next five, 10 or even 30 years. If you plan on doing a lot of traveling over the next couple of years (or relocating), buying is not an option.Employment
Your job definitely plays a big role in your final decision. If you work in a field that requires relocation every two years, you are better off renting. Working in a stable field makes purchasing a home more logical, but there are still no guarantees that you'll always be working in the same city.Behavioral patterns
You may want to sit down and analyze your behavioral patterns when it comes to moving. Do you become easily jaded and antsy in your living environment? Do you move every year? Do you frequently consider leaving town? If so, you might want to hold off on buying a home.Finances
Your financial situation is a major factor in buying a home. Can you afford the extra monthly payments that a mortgage requires? Do you have the cash for the down payment? What about other expenses? Are you planning on buying or leasing a car?Your cash flow situation at the end of the month plays a major role in your decision. It is one thing to want something, but you have to determine whether you can actually afford such a commitment.
Other important questions include: Which option offers more value (expense vs. investment)? Which option offers more stability? Which one allows more tax deductions?
why buy your home?
Sense of pride
I know this is a "feel-good" reason, but it's true -- at least for most people. You'll have a greater sense of accomplishment when you own a home.Steady payments
As a renter, you run the risk of having your rent increase. With a fixed rate loan for the purchase of a home, however, you will ensure that your monthly payments are steady for the duration of the term.Better credit opportunities
It will be a lot easier to apply for other loans if you already own a home. You can build equity over time and borrow against it. Credit card companies typically favor homeowners, which is why one of the first questions in credit card applications is, "Do you rent or own a home?"Freedom
You can do whatever you want to your home. You don't need the landlord's approval every time you want to paint or redecorate.Other advantages
- Real estate taxes are also tax-deductible.
- Homeowners can benefit from tax-free profits on the sale of their primary residence up to $500,000 (if you are filing jointly with your spouse and have occupied your home for two of the last five years). If you are single or married and filing separately, you can enjoy tax-free profits up to $250,000.
- Interest on home equity loans up to $100,000 can also be deducted from your income taxes.
- Buying a home can be a way of saving for retirement by building equity.
- Purchasing a home is a rather secure investment; prices usually don't go down. On the contrary, you can expect prices to go up over time -- unless you bought in an extremely hot market or next to the local nuclear power plant.
- You don't have to worry about following the landlord's rules or being kicked out for breaking them. However, keep in mind that many condos do have rules established by the association.
should you rent?
Here are the main reasons you should consider renting your place rather than making that big investment.Small initial payment
At worst, you make a security deposit for the first and last months' rent. If you buy a home, you need to shell out a 10% to 20% down payment, which is equivalent to several years' rent.Higher flexibility
This is a great benefit if you're young or you have to move quickly. When you rent, you can move whenever you want; you don't have to wait for your house to be sold. If you choose to relocate, the worst thing that will happen is that you'll lose your security deposit. That's nothing compared to the potential losses you could suffer if you have to sell your house quickly.Less risk
You don't have to worry about natural disasters (earthquakes, floods, storms, and so on) that might inflict serious damage on your home. As a renter, you simply need insurance for your personal property, while the landlord repairs whatever needs fixing.Also, if you have any doubts about your financial or job security, I would strongly recommend that you lean toward renting. Losing your job is bad enough; you don't want to lose your home in the process.
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