Own vs. Rent

The Pros and Cons

If you’re considering purchasing a home then chances are you’ve either considered renting, or have rented, as well. Today you can find cases to support either decision. You can also find cases to deter you from either decision. So, let’s examine some of the pros and cons.

Owning a Home: The Pros

Here are six significant reasons to take on ownership.

1) Tax Deductions: Although they are the stuff that bill-paying grumbles are made of, mortgage interest and property tax obligations are a homeowner’s best friend come April 15. For both federal and state income taxes, these payments are usually fully deductible. And in the first years after a home purchase most of the money paid toward those mortgage payments represents interest. Thinks of it as a government subsidy on the purchase. In addition, many closing costs, such as points paid and fees for your appraisal, may be deductible , either immediately or down the line when (and if) you place that “For Sale” sign in your front lawn.

2) Appreciation: We’re of course talking about the financial kind. Homes are considered a safe, and steady, investment with values that rise as the debt decreases (Value goes up as you pay down the balance). The National Median Home Price has risen every year –even during periods of recession and sales declines- since 1968, when the NAR (National Association of Realtors) began tracking it. Typically, the values appreciate at the rate of inflation, plus a point or two. Sometimes it’s a greater increase. In 2004 for instance, the median house price went up by 9.4%. A good long term investment? We sure think so.

3) Equity: The portion of your home that you actually own is the portion that you’ve paid off. This paid off portion is called equity. This equity can grow as your home appreciates and you continue to pay the balance down. This appreciation is yours to access whether you utilize a Second Mortgage to access it, or when (and if) you sell your home. It’s like a built in savings account. What’s more, a first home often leads to a better second home. Equity buildup (paying your mortgage down) and appreciation (your home’s value going up) help in the transition to a second home. According to the NAR, first time home buyers’ median down payment is 3 percent; repeat buyers (homeowners) meanwhile put down 22 percent. This large percentage of money down is generally from the equity in their previous home. Money down generally means more home for a lower interest rate, lower monthly payments, and no mortgage insurance costs associated with low down payment programs.

4) Borrowing Power: For owners who opt to stay put, equity still comes in handy. It can be used to secure a loan or obtain a line of credit, meaning more buying power to fund home improvements or to assist with the purchasing of an investment property. This equity can also be used for emergencies or big ticket items (cars, school, boats, etc, etc).

5) Stability: Renters generally do not know what they’ll be paying in rent in the near, and distant, future. Homeowners on the other hand can lock in on a 30 year mortgage and be guaranteed the same payment for 30years. Even if a homeowner chooses an adjustable rate mortgage (ARM) they will know the predetermined amounts the rate can adjust. Additionally, homeowners know where they’ll be living in the future. They can spend money on improvements and know they will reap the benefits of these upgrades.

6) Freedom: It’s your home and you own it. It allows you to decorate it if you want to, make improvements, turn your music up, build a patio, or do nothing. There are no landlords or noisy upstairs neighbors to contend with. It’s your piece of the world.

Renting: The Pros

Here are some pros to renting.

1) Limited Obligation: When you rent you obviously don’t own the home. Over the years it goes without saying that a home will need some upkeep to offset the wear and tear of the occupants. As a renter this financial burden will not fall on your shoulders.

2) No Taxes or HOI: As a renter you are not responsible for the property taxes or the home owners insurance (HOI).

3) Flexibility: As a renter you can move as soon as your lease is up without the muss and fuss of selling or renting your home.

4) Low Upfront Costs: As a renter you are generally only obligated to come up with a portion of the rent and a security deposit which is refundable at the end of the lease.

Owning a Home: The Cons

The cons of owning a home are basically the pros of renting.

1) Upkeep: It’s your home and if there is some updating that needs to be done you’ll have to decide if you’re financially ready to take on the work. Many individuals draw from their equity to accomplish these tasks and that is a benefit of homeownership.

2) Taxes and HOI: As the homeowner you’ll be responsible for taking care of the property taxes and insurance. These costs are generally worked into the monthly payment. This process of working the costs of these items is referred to as your escrows. Ask your Loan Simple advisor for an estimate of what you’re monthly expenses may equate to.

3) Upfront Costs: When you’re purchasing a home you’ll need to consider expenses you may incur at closing. There are programs designed to get you into the home with next to nothing out of your pocket. However, you’ll have to weigh the pros and cons of these options to determine what makes the most sense to you.

Renting: The Cons

The cons of renting are simply that you’ll experience none of the gains of homeownership.

1) No Equity Gains: As a renter you’re helping the owner pay off their mortgage and this in turn increases the equity in their home. As a renter you’ll participate in none of these gains.

2) No Tax Deduction: As a general rule you cannot deduct the rent you’ve paid against your income on your federal tax returns. There are some State-by –State rent reductions available under specific circumstances set forth in that State. See an accountant or tax attorney for further information.

3) No Borrowing Power: As a renter the home you live in is not an asset you can utilize for financial assistance in the event of an emergency, large purchase, or financial need.

4) Fluctuating Rent: As a renter you’re subject to the inflation of your rent. As a homeowner you can lock in your payment for periods of thirty plus years.

5) No Ownership: As a renter you’re not the owner of the home and in most cases this means you are limited as to what you can do to make the home your home.

The Simple Truth

The Simple Truth is that there are pros and cons to either decision when it comes to renting or owning. However, it is important to note that the pros of home ownership greatly outweigh the cons, and several of the pros of renting are also pros in ownership (Selling a home can be quick and generally has the upside of the financial gain of the equity of the home being realized at the sale. A renter will not get this gain.) This is another one of those one size does NOT fit all scenarios. You need to measure your needs and desires against the pros and cons of either decision.

At Loan Simple we have provided you with tools and an Advisor to help assist you in finding the option that is best for you.