Tuesday, January 7, 2014

3 Key Factors in the Buy vs. Rent Argument

I was a long-time renter before I ever bought a home.  I enjoyed renting and found a variety of aspects much more beneficial than being a homeowner.  However, when considering the “rent vs. buy” argument, there can be several major factors that sometimes get left out of the equation and that can play huge roles in the decision-making process.

Timeframe
The planned timeframe for living in a home or apartment can make a huge difference in the decision as to whether to buy or rent.  If that timeframe is only a year or two, or even less than five, all the costs involved in obtaining a mortgage and buying (and eventually selling) a home might make it far more expensive than renting.  However, if a buyer is looking to be in a home for a substantial period of time -- say 10 years or more -- it could be enough time to recoup some of those many carrying costs that go along with home ownership.

Mortgage interest
According to creditloan.com, the average American’s interest payments on debt total $600,000 over the course of a lifetime.  They go on to note that, “After 30 years of making payments, a homeowner with a $240,000 mortgage loan will have paid over $580,000 on his/her house.”

Interest on a mortgage can add substantially to how much it costs to own a home over time.  Factor in things like property taxes, home repairs and maintenance, homeowners and possibly mortgage insurance, higher utility costs, and other home expenses that might not come with a rental or that might come in lesser amounts, and the costs to own may not seem so great as when compared to renting.  And even just a one or two percent increase in interest on a mortgage can equate to tens of thousands of additional dollars on a loan’s overall cost throughout its term.

How a loan is amortized can also affect how long it could it could take living in a home to make it worthwhile.  Understanding that maybe only $200 or $300 of a $1,000 mortgage payment toward the beginning of loan may be going to principal while the rest goes to interest could make a big difference in whether it’s better to rent or buy for a particular length of time.

Closing costs both when buying and selling a home
Closing costs on a home can add substantially to how much it costs to become a homeowner, how much it costs to sell, and whether it’s better to rent or to buy.  There can be closing costs not only associated with the sale of the home, but with purchasing it as well, and such costs can range into the thousands or even tens of thousands of dollars.

When purchasing a home, there can be the costs of obtaining a mortgage, inspecting the home, insuring the mortgage, insuring the title of the home, and insuring the home itself.  When selling there can be credits to the buyer, title company fees, costs of paying off a mortgage, real estate agent commission, postage fees, and additional costs that can really have the costs of selling a home skyrocketing, whereas with renting, many, if not all such fees can be avoided completely.

Therefore, the next time you’re considering whether it’s better to buy or to rent, remember that there can be much more than just the price of a mortgage to compare to the price of a rental to help make your decision…much more.



Disclaimer:

The author is not a licensed financial, tax or real estate professional.  The information provided in this article is for informational purposes only and does not constitute advice of any kind.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.

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