Although owning a home means mowing the grass, fixing leaky roofs and replacing worn out furnaces, nearly all Americans desire to own their own homes. Most attempt to buy homes as soon as they can, but there are several important issues to consider before rushing into the purchase of a home. Depending on your own financial and employment situation, renting could be the smarter option.
The following are some pros and cons of both renting and buying a home.
Renting a Home
Pros of Renting
- Flexibility (can relocate easily)
- Can invest money elsewhere
- No maintenance or repair worries (also, no cost or time spent on maintenance or repairs)
- No down payment required
Cons of Renting
- No equity
- Annual rent increase could outpace inflation
Buying a Home
Pros of Buying
- Potential tax-free capital gain
- Pride of ownership
- A portion of mortgage payments go toward building equity
- Tax-break (deduct mortgage interest and property taxes)
Cons of Buying
- Down payment required
- Property taxes will continue to increase
- Maintenance or repair worries (also, cost or time spent on maintenance or repairs)
- Less flexibility should you want to move; in a bad housing market, you could even lose your principal
You should check on the sales price trends of homes in the neighborhood you are considering. If it looks like the area is declining in value, you’re probably better off renting.
The Bottom Line
My bottom line advice to recent grads is this: As you enter the workforce and begin accumulating cash, resist the urge to jump immediately into a house before having an emergency fund and a significant down payment. Otherwise, you will soon be using credit cards to buy the many things needed to furnish, operate and upkeep the house. A good goal is to have saved a minimum of 25% of the purchase price of the home. If you put down 20% you will avoid costly private mortgage insurance (PMI). Other costs involved with securing a loan, title costs, moving costs, and purchasing a few new furnishings or lawn tools can easily make up another 5%.
Also—due to the expenses involved with buying and selling a house—you’re usually better off renting if you don’t plan on staying in the same location for at least 3-5 years.