12/1/2022
Although for many people owning their own home may be seen as a sign of success, not everyone has the same aspirations. Deciphering this dilemma is critical to managing your personal finances, so we'll take a look at what might be better, renting or buying your primary residence.
Which is better, buying or renting a home?
While there are those who support the idea of renting, others also make the case for buying a property. In the end, this decision may come down to the amount of money invested in each case or the desirability of owning or not.
It's something worth figuring out, especially if you're thinking about buying a home for the first time.
In terms of numbers, the ownership rate for those under the age of 35 stands at 34.1%, the lowest in the last 50 years. This figure represents half of the total ownership rate within the United States.
This is combined with the perspective that millennials and later generations view buying a home as a bad deal.
On the other hand, interest rates continue to fall for taking out mortgages, making monthly payments cheaper than rents.
This applies to some parts of the country, especially rural areas. Including all the expenses involved in owning a property, there are 53% of counties where you pay less to own a 3-bedroom home than to rent.
Arguments in favor of renting a property
When considering renting vs. buying a home, you should analyze what favors each option. When it comes to renting, think about the following:
Principal balance of the mortgage
Assuming that the average person does not have $150,000 or $200,000 to pay for a house in cash, you have to resort to a mortgage loan. If you are approved for this financing, you should understand that the monthly payment for the first 10 years includes more interest than the principal balance.
This is best illustrated with an example:
Let's assume you have a $200,000 mortgage with a fixed rate of 4.5%, which gives you a monthly payment of $1,014. Of this, the first payment corresponds to $264 in principal balance and $750 in interest. After 20 years, your monthly payment will include $647 for the principal balance and $367 for interest.
The escrow account
A home with a mortgage is considered an important investment for the owner and the bank. Therefore, an escrow account is established, which takes one-twelfth of the monthly payment to pay insurance and taxes. This avoids any lien on the property or an accident that leaves the house destroyed.
In addition, when you put less than 20% of the down payment, the bank requires you to take out Private Mortgage Insurance (PMI) which serves to protect its interests.
May interest you: How to obtain 100% of the house value with a mortgage loan?
The money from this policy is handled through escrow and serves as collateral in case of default. Since this is part of the mortgage, it also reduces the principal balance payment.
Renting offers more flexibility
Among the advantages of renting a house or apartment is the possibility of choosing from a wide variety of properties. Being able to move easily is more attractive for those who don't want to be in one place, change jobs frequently or don't have a family.
Depending on your lifestyle, this option will be more or less attractive.
Reasons to buy a home
People who prefer to buy a home instead of renting, usually rely on reasons such as:
Tax benefits
Those who take out a mortgage are entitled to deduct the interest generated by this financing when the property is worth less than $1 million.
You can also deduct the interest if you ask for a home equity line of credit for less than $100,000. In addition, you can deduct the origination fee during the first year.
It may be cheaper
To find this out, you need to calculate the price-to-income ratio of the market where you plan to buy the home. The formula includes the price of a house and the monthly rent for one year.
For example, a $150,000 property with a rent of $900 a month would give you 13.88 ( 150,000 / ( 900 * 12 ) ). The lower this value is, the better it is for buyers and an indicator below 20 favors the acquisition.
Comfort and peace of mind
In addition to increasing your equity, an essential advantage for many is the possibility of doing with your property as you see fit. You can renovate, annex, set up a business or rent without asking a landlord's permission.
On the other hand, you are not forced to move and you will not be subject to regular inspections, which is often the case with renters.
Buying vs. renting is a decision that may depend on economic or personal sense. Since at Busconomico we favor good personal finance management, we are inclined to make an objective evaluation based on your lifestyle and needs.
Español: Alquilar o comprar una vivienda, ¿qué es mejor para ti?