esm7i Is it better to buy or rent a home? To make a good decision about whether pursuing homeownership is the right move, it’s essential to compare the differences between being a renter and being a homeowner. Access to relevant information will help you weigh all the benefits and trade-offs between the two.
Here are some key ways homeownership is different from being a renter:
The pros of renting a home
Home insurance doesn’t cost you a fortune. Insuring your home is generally much more expensive as an owner than a renter. Renter’s insurance is designed to cover your personal property only, while homeowner’s insurance covers the actual structure and your personal belongings and property.
If you have a mortgage, homeowner’s insurance is a requirement of all lenders, and there must be enough coverage, at minimum, to cover the cost of the dwelling itself. In a rental situation, the property owner typically has dwelling-only coverage. Therefore, a renter’s property-only policy is generally the renter’s choice to obtain. However, we definitely recommend you do so to protect your personal items from fire, theft, or other types of covered loss or damage. To learn more about homeowner’s insurance, check out this article.
You don’t have to commit to home costs and fees
As a homeowner, you are inherently committing to the property itself and its location and surrounding neighborhood. If issues arise that are detrimental in any way, as a homeowner, versus a renter, it’s not easy to pack up and relocate. In addition to the basic costs of moving, transactional costs are associated with initially buying and later selling the property. There are sizable transactional costs when you sell your home—real estate taxes, closing costs, and, if using a realtor to sell the property, a percentage of the sale price will go to covering their commissions, your agent, and the buyer’s agent split the commission fee—typically 6% of the purchase price of the home. If there’s a good chance you will want or need to relocate within the next few years, buying a home right now might not be a wise financial idea.
Renters are free to leave when their lease ends, and under certain situations, a landlord may be willing to end a lease early, but usually with a cost. This is usually much less expensive than the costs of selling your home.
Home repairs and maintenance costs can be expensive
As a homeowner, you are the sole party responsible for all of the maintenance and repairs to the property. These costs might include repairing the roof and siding, broken windows, heating and air conditioning maintenance, lawn care, snow removal, plumbing, electrical, painting, and pest control. As a renter, typically, this upkeep is the owner or landlord’s responsibility.
You aren’t responsible for property taxes
Property Tax rates vary widely and are set by the location, city, county, and state. While a homeowner will pay taxes directly, a landlord will generally factor the tax rate into the rental amount you ultimately pay.
The big difference between homeownership and renting here is the personal tax benefit currently associated with homeownership. Under the current tax code, all amounts you pay in mortgage interest is 100% tax-deductible (up to $750,000 in mortgage debt for heads of household, single filers, and married couples filing a joint return; the limit is $375,000 if married and filing separately).
The final impact depends on your financial situation and overall tax liability. As a sole renter, however, there is no associated tax benefit other than a potential small renters’ credit. Check out this basic of taxes article to learn more, and remember our information is strictly educational. Always consult your tax, legal, and accounting advisors before acting on any information.
Home equity builds over time
When you are a homeowner, a portion of every mortgage payment you make typically increases the excess value you have in the home, more commonly known as equity. Each mortgage payment you make has a portion paid for interest, which the lender keeps, and a portion that reduces the unpaid principal balance. If, for example, your total monthly house payment is $1,200, $85 of it would cover insurance, $210 to taxes, $630 to mortgage interest, and the remainder, $275, would reduce the principal balance. That portion is considered additional equity in the property.
As each payment is made, the amount paid directly to the outstanding principal balance increases as interest decreases. As more payments are made, the total portion of the reduced principal serves to build equity in your property. This, in turn, is a form of savings that eventually translates to a more valuable asset. Some people borrow against that equity to make home improvements, sell the home and take equity in cash or use it as a down payment on their next move-up home.
Renters, conversely, do not build any equity. The rental payments to the landlord are just that, payments.
So as a homeowner, you are generally growing equity as you make each mortgage payment, and there is no savings or equity wealth accumulation as a renter.
The value of your home appreciates as the market grows
Besides building equity from your monthly mortgage payments, generally, over time, your home’s value will appreciate. Under normal market conditions and depending on your location and property condition, it’s assumed that a home’s value could appreciate or increase each year. The amount of increase is very market-specific, and it’s important to understand that there is also a risk that property values could decline. Property values could fall if your area has low demand, rising crime rates, or aging properties that aren’t being maintained. Things like the quality of schools and the local government could also significantly impact your potential appreciation.
When considering appreciation in the homeownership decision, the unknown property values, both appreciation or depreciation factors, make homeownership a higher risk than a rental situation. Being a renter in a location with great schools may be more expensive than being a homeowner in an area with high crime rates.
