Buy or to Rent: Is Tenancy or Homeownership Right for You?

If you are questioning whether it makes more sense to buy or rent a home, know that each option comes with significant benefits and drawbacks. Both are major financial and lifestyle decisions and there is no single answer for everyone. Therefore, before signing a mortgage or a lease, weigh the benefits and drawbacks of each choice.

Homeownership benefits

There are many good reasons to purchase a home of your very own. Among them is the sense of security and freedom owning can provide. As the mortgage holder, you have the right to make changes to the property. For example, you don’t need permission from the landlord or building owner to pull up or lay down carpet, change the kitchen countertops, or remodel the bathroom.

The financial advantages owning has over renting are also strong. Over time, most homes increase in value, meaning your investment appreciates. In the first few years most of your mortgage payment is comprised of interest charges (which is tax deductable!), and after that you’ll begin to pay off the principal. As the balance of your loan declines, the amount of equity you have in the property will steadily climb. Being a homeowner also has credit history advantages. Lenders may perceive you as a good credit risk because your home can act as security against future loans.

Homeownership drawbacks

In many circumstances, buying a home is an expensive venture. You’ll be responsible for not just the monthly payment of principal, interest, taxes, and insurance (usually referred to by its acronym PITI) but what it takes to buy the home. Before you set foot in your very own door, chances are you are going to have to come up with quite a bit of cash for pre-purchase costs. Accumulating thousands of dollars can take a lot of time and effort. Because of the upfront expenses and the monthly outlay, homeownership is not for everyone.

Another problem associated with owing your home is that if you want or need to sell but the housing market is down, you may end up stuck with the mortgage. This can cause a lot of financial and emotional stress. In the worst-case scenario, it is possible to lose the home to foreclosure if you are unable to make your payments. If that happens, all the money you put in to it is gone too.

Renting benefits

Being a tenant comes with its own set of benefits. Renting can offer a sense of freedom. Rather than having the license to do what you want with the property, you are free to leave when your lease or rental agreement is up without having to find a buyer. If you don’t want to make a commitment to a specific home or neighborhood, or know that you will not be in the area for long, renting can be the ideal choice.

Some people choose to rent their home because it is more cost effective than buying. Outside of the security deposit and first and last months’ rent, it usually doesn’t take much to get into a rental. In some areas of the country, the monthly payment is less expensive than a mortgage. The money you save by renting may be put to greater use in other types of investments. Additionally, the landlord rather than the tenant is usually responsible for most of the property’s upkeep, which can greatly reduce expenses.

Renting drawbacks

The primary problem associated with renting is that you never accumulate any equity. In fact, the money you pay each month builds the owner’s net worth, and can be a drain on yours. Also, most rental properties have a rules and guidelines that you have to follow. The agreement you sign is a contract, and it binds you to those restrictions, such as not having pet or parties, and a specific number of people who are allowed to live in the home.

Though renting does offer a level of freedom, you may sign a lease where you promise to be a tenant for a certain number of months. If you break that contract you may be held responsible for the remaining months’ rent. That can be a substantial amount of money if you agreed to remain in the property for a long time.

While many people believe that becoming a homeowner is the best choice for everyone, that is not necessarily so. It is very easy to get in over your head by buying a home that exceeds your budget’s comfort zone. It is also very easy to get used to the simplicity that tenancy offers, and waste a lot of money in the process. So is renting or buying right for you? The answer depends on you financial circumstances and lifestyle needs.

Content provided by our trusted partner  HawaiiUSA FCU & Balance, your financial literacy partners
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