To buy or to rent: What are the benefits of homeownership?
It’s a big housing question that nearly everyone faces at some point in life: Should you rent or should you buy?
The decision to rent or buy a home is a major life decision and it’s not an easy one. It doesn’t just affect how much money you can spend, but also how much you can save. It’s a decision that has many layers and requires careful consideration – there are plenty of arguments to be made for each side.
There are numerous factors to consider when determining the better option for your lifestyle, such as your location, how long you plan to stay in the home, and the up-front and hidden costs of homeownership, to name a few.
Timing is everything
Once upon a time, buying a home was the epitome of the American dream.
Then came the housing boom and bust of the late 2000s, when home values failed and foreclosures were up. People learned some hard, often disastrous lessons about home value and how closely real estate is tied to the entire economy.
As a result, homeownership has declined in the majority of America’s biggest cities, according to Trulia. In 2000, national homeownership was at 67.1 percent, rising to 69.2 percent in 2004 before crashing to an average of just 62.9 percent in mid-2016.
However, as regulators intervened and mortgage rates dropped to their lowest rates over the last 30 years to under 4 percent in 2016, home ownership has become more affordable nationally. According to a Trulia market affordability study, in 2016, the median household could afford a home 1.5 times more expensive than the median home price. In 1980, when mortgage rates had grown to a staggering 30 percent, the median household could only afford about 3/4 of the median home price.
Today, the market has slowly recovered. Home value gains are increasing and inventory is limited. As mortgage interest rates are beginning to slowly rise— the average interest rate of a conforming 30-year fixed-rate mortgage jumped from around 4.0% in November and December to 4.4% by the end of January—affordability could be on the chopping block, according to Zillow.
“For nearly a decade now, homebuyers have been buoyed by historically low mortgage rates that made buying a home more affordable than it was for prior generations, but tomorrow’s buyers may not be so lucky,” said Zillow Senior Economist Aaron Terrazas. “Rates are showing a clear upward trend, bringing an end to an era of historically affordable mortgage payments.”
What are the benefits of homeownership?
For some people, homeownership is still very important and is widely recognized as a way to build wealth over time. Self-made millionaire David Bach told CNBC Make It that “buying a home is the escalator to wealth in America. Homeowners are worth 40 times more than renters.”
With mortgage rates still relatively low, buying a home is particularly attractive. Plus, there’s the tax benefits: the interest you pay on your mortgage, as well as property taxes and mortgage insurance premiums can be itemized as tax deductions. Finally, there’s the freedom of having creative control over your living space. Have a hankering for French doors? Just do it. Want a fancy basement wine cellar? Done. Dreaming of a large bay window? It’s all yours.
“It’s an investment,” Will Featherstone of Featherstone & Co. told Forbes. “Each month you write a check for rent, that’s money you’ll never see again. Each month when you pay your mortgage on a home you own, you’re making an investment in something you personally own. You’re building equity — the portion of your home you’ve paid off. Building your wealth through homeownership is how many people invest in their futures.”
Homeownership has its benefits, but they come at a cost. A home also comes with a lot of so-called “hidden costs”—out of pocket items beyond that monthly mortgage check, everything from HOA fees to regular maintenance costs to major projects, like replacing a roof.
What are the benefits of renting?
Finances are only part of the decision equation in determining the benefits of homeownership and whether it’s right for you. Other factors such as flexibility, career mobility, and maintenance are all good reasons to rent, particularly among millennials who are now considering whether to rent or buy.
“Millennials tend to value experiences over material possessions. Consequently, when a new job opportunity or a new adventure on the other side of the state or across the country calls, they want the freedom to be able to answer, and being tied to a mortgage isn’t conducive to that semi-nomadic lifestyle,” Forbes notes.
Even if you aren’t a millennial, writing one check every month secure in the knowledge that any maintenance or repair issues that come up will be someone else’s problem can tilt the balance in favor of renting. “Determine how long you plan to live in this home, and if you have the funds to support a down payment now as well as all the hidden costs of homeownership such as closing costs, taxes, appraisal, appliances, maintenance and HOA fees. If you think you’ll pay less rent while living there as compared to the down payment plus hidden costs, then it is financially advantageous to rent versus buy,” Chuck Hattemer of Onerent told Forbes.
“Buying a home is a gamble,” writes Zillow CEO Spencer Rascoff and Chief Economist Stan Humphries in their book, Zillow Talk: The New Rules of Real Estate. “It’s a gamble that we will want to keep living in one place – and keep making the mortgage payments that come with it – for years and even decades into the future.”
Ready to take the gamble?
If you’ve figured out that the benefits of homeownership outweigh the benefits of renting and think it’s the right time to transition, congratulations! Becoming a homeowner is an exciting and rewarding experience.
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