Most Americans think that being able to buy your own house is the beginning of the state when they can say “I’ve got it made!” However, many couples and families who tried to own a house realized that it’s no joke. In fact, this big financial decision is one of the biggest stressors to the American populace and probably in other nations as well.
If you have made a decision to buy a house, carefully study the pros and cons of the matter before your American dream turns into a nightmare.
At this point, you have to realize that when you buy a home, there are so many questions you need to answer. Do I really need to buy my own home? Will my income be big enough later to afford the monthly payment? Will I live in the house permanently to enjoy it? Do I have enough savings? Can I handle the enormous responsibility of maintaining a house?
Buying a house is a huge financial decision so it matters to weigh carefully the positive and negative aspects. The details in this article will help you look at the pros and cons of owning a home according to your personal preferences, plans for the future and overall financial situation.
When comparing whether to rent or buy a home, remember these things:
- Homeownership is not good for everyone.
- Homeownership demands that your income grow steadily or become stable enough
- You can enjoy the financial benefits of owning a home in the long run. However, you must already have a budget and a savings plan before you decide to buy. It is a serious and demanding responsibility to own and maintain a home.
- Your credit score matters with respect to the maximum amount you can borrow and for how long.
So, if you have considerable credit card debts, you need to pay them all or most of them before you apply for a mortgage. You can ask for the assistance of a credit counseling agency, a debt management program, or a financial advisor to see how you can manage to do it.
Should You Need To Buy?
Since buying a home is one of the biggest financial decisions you could ever make, it is indispensable to make a projection on how it would affect your life not just financially but also quality-wise.
In addition to rent vs buy calculator check which can help you to calculate and understand your financial options, it makes a lot of difference to review all of the good and bad sides of becoming a homeowner before you decide to commit yourself to a mortgage.
The Good Side of Buying
Deductible Mortgage Interest
Any amount that you can deduct from your income tax is widely-received as an advantage. So, in this case, whatever mortgage interest that you pay for the year can be a tax deduction. And during the early years of your loan, this is not small change – we’re talking about thousands of dollars that you can effectively save.
When you have the right to your own house, you can sleep soundly without any fear that a landlord might ask you to vacate the property any time. Tenants cannot dictate how long they want to stay in a house beyond what they have agreed upon with their respective landlords.
In some circumstances, the landlord can file for an eviction notice against the tenant. If you own the house you live in, you can stay there for as long as you want. You can also enjoy the freedom to do anything legally possible with your property: you can renovate, decorate, or make changes as you please.
When you purchase a house, it becomes your asset and you should consider it an investment. Why? Because you are free to turn it into a money-making venture by renting it out or selling it, as you deem fit and real estate normally appreciates in value.
Of course, for it to be totally and legally yours, you have to pay off the entire mortgage first. After that, you have to pay all property taxes and homeowner’s insurance. If you have enough money and you buy your house in cash, you’re already ahead of the pack.
Any investor worth his dime knows that it is always best to invest in something that increases in value naturally over time. Even if there were times in the U.S. housing market when property prices fell, homes prices have traditionally consistently risen. Homeownership as an investment is a long-term strategy so better keep that in mind.
The Bad Side of Buying
Interest and Fees
You have to face it: you’ll be paying interest and fees over the term of your loan and they’re going to add up. You also need to prepare for the interest rate to swing up or down, especially if you have a variable interest rate or when the period for your fixed rate is over.
As the owner of the house, the maintenance becomes your responsibility. So, if the heater breaks down at two in the morning on a cold night, you have to be the one to call the heating contractor for emergency repairs.
And did we mention, you now have to pay for the repairs yourself? You will have to pay for plumbing works, roof repairs, cracks or leaks, window repairs, and a hundred other things that can break down over time. It’s really expensive to own a home just because of these reasons.
No Financial Freedom
Having your money tied up in a property will cost you. When you are renting, your monthly budget for rent is not as big as your budget for the house payment. This means that you would have extra money that you can save or use for other expenses. This money could be for travel, study, leisure, or even to put up your own business.
If you have the knack for it, you could use it to build up your investment portfolio which could generate a bigger and quicker income stream than a property. You may give up this kind of liberty when you buy a house.
Lack of Mobility
When you are investing in your own home, you can’t just decide to relocate to another city or state in a snap. In case you really, really need to move, you have to consider your property. You can either sell it or rent it out and find a place to stay in the area where you are moving to.
Now, you can’t always tell the situation in the housing market or whatever other conditions may come but trying to sell your house could take months or even years. If you try to dispose of your house really fast, you may have to sell it at a loss.
Housing Market Exposure
There is a high probability later that you would want to sell your house. The U.S. Census Bureau reports that the average American moves 12 times during his lifetime. This means that you have to accept the reality that you may have to sell your house later. When that time does come, your house’s market value may be higher or lower than what you’ve paid for it.
The problem is, if you do not have enough equity to cover the agent’s commission, closing costs, other fees, and the balance of your mortgage, you will have to pay for them out of your own funds.
Should You Need To Rent?
The Good Side of Renting
When you choose to rent instead of buying, you won’t have to put all your money on costs that come with buying a home. You may be using some of your monthly income for rent but most likely, there would be a lot left over for you to use for other expenses, savings, or investments.
Of course, it would have to depend on what investment instruments you choose but there is a good chance that you can get a greater return of your investment than if you’d use your money to buy a house. You need to pay careful attention to your investment goals and strategies.
Perhaps at this time, you don’t relish the idea of having all your savings and monthly income go to cover the deposit and mortgage payments of a house. You might still have plans of going back to school or maybe go globetrotting to your dream destinations. These would need some pretty stringent allocation of funds.
Almost No Maintenance
As a responsible homeowner, any problem on the house falls on your lap – the repairs and maintenance costs are yours to pay. The situation is different when you are renting because you normally don’t have to worry about these things.
If the roof leaks or the toilet backs up, you just call the landlord and wait. It’s the landlord’s responsibility to call the repairman or plumber or whoever can fix it. You don’t have to worry about such stuff.
Are you a wanderer, or a rolling stone, or maybe footloose? If so, renting might be for you because your house won’t have to tie you down. Except unless if you’ve signed a very long lease, it’s easy to just get up and go when you’re just renting the property.
Homeowners have to sell their house before they can move. And remember, it’s not easy to sell a house – sometimes it will take ages.
Renting allows you to be flexible when you need to. When your lease expires or if you happen to change jobs to a different state, you can freely relocate from home to home or area to area.
This is something that you will not enjoy when you own the house. You won’t have the same financial attachment to the home you are renting so it’s easier to decide when to pack up and move on.
For those who are just starting out, buying a home often means putting all your eggs in one basket. Most of your monthly income will probably have to go to a single asset that is the house. Would you feel comfortable having most of your savings tied up in just one investment?
When you rent, you can easily free up some funds that you can now save or invest in a broader list of options. Diversifying your investments allows you to spread the risk so that in case any adverse event happens to one sector of the market, you don’t bear it in full. If all your investment goes to the house, a housing market crisis could cause irreparable damage to your financial situation.
The Bad Side of Renting
“Throw” Your Money
Where do you think the rent you pay goes? In all probability, the house’s owner uses your rent to pay for his mortgage and property taxes. So technically, you may be paying for his or her asset. He or she can just decide to sell it when a good offer comes along and make a fortune. You are, therefore, financing their investment.
As we’ve mentioned before, even though you pay for upgrades or updates on the property, they will not benefit you. They will benefit the landlord but you don’t get to see any return on your money.
Rent is a cost that, historically, has risen consistently and seldom gone down. Therefore, expect it to increase steadily over the years due to inflation and the rise in property prices. Now, it depends on the area where you live but usually, mortgage repayments are higher than the monthly rent.
However, as the mortgage nears its end, the interest charges become lower while a bigger portion of your payment goes to retire the principal. Rent, on the other hand, will continue to go up.
Most homebuyers can pay off their mortgage in about 30 years, after which they just have to worry about home maintenance costs and homeowner’s dues. The upside is, they’ll be free of large monthly amortizations and can enjoy the house as their own.
If you are a tenant, you’ll always have to pay rent. Once you’re just relying on your retirement income, it could be difficult to make rent each month. It could become even more difficult to absorb rent increases with your limited fixed income.
No Forced Saving
Paying off your mortgage month-by-month may sound like a big burden but here’s the silver lining: it works like a forced saving. You have an obligation to pay your mortgage every month but it’s basically funding an asset that could really appreciate over time.
However, when you are renting, after paying off the month’s rent, you don’t normally save or invest whatever extra is left. Rather, they go to other expenses or worse, pay off for leisure activities.
More Factors To Pay Attention
How do you know if a property is a good buy? As a homebuyer, you should also be familiar with the rules for real estate investors such as the 1% rule or 2% rule. They will guide you to determine if a property is a good investment.
Aside from the 1% rule and 2% rule, you might also encounter the 50% rule as well as home’s gross yield rule, all of which are quite easy to understand.
The 1% rule states that you can only invest in a rental property if the monthly rental can cover 1% of the purchase price. For example, if a home is selling for $300,000, it must bring in at least $3,000 in monthly rent for it to be worth your while. However, in reality, this is very difficult to achieve.
The 2% rule is twice difficult. It follows the same principle except that the rate has doubled. So, taking our previous example, you now need to get $6,000 in monthly rentals. Receiving $6,000 a month may sound like music to your ears but it’s close to impossible in many situations unless you can buy a property at a low, low, low price. And one more thing, if you are able to buy a property at a big discount, you’d probably need to shell out more money to fix it up so that it can command such a steep rent.
The 50% rule simply states that half of your monthly rental would normally go to your operating expenses for the rental property.
Lastly, there’s a home’s gross yield which you can compute by dividing the annual rent by the purchase price. So let’s say the annual rent is $24,000 and the purchase price is $300,000, your gross yield will be 8%. Experts say that if you reach 8% or higher, it’s actually pretty good and if you happen to hit double-digits, that’s already awesome.
These rules do help but you should not rely on them alone to make your buying decision. It’s more accurate to factor in the real costs using real-time figures such as current mortgage rates, home price appreciation, maintenance costs plus your own desire to own vs. rent, and a lot of other factors.
So, what you need to do is sit down, get your calculator and do some pencil-pushing. This way, you’ll get a more accurate picture than merely using rules of thumb.
Sometimes, a property will defy the rules – they can be good purchases even if the rules don’t say so. In some cases, even overpaying for property works to the advantage of the homeowner.
Are you ready to decide?
Once you’ve done weighing the pros and the cons of buying and renting and eventually decide that buying a home is the right decision, it’s time to organize things.
Prepare everything that you will need before you start searching for the American dream house: an appropriate deposit, money to pay for the other costs that come with buying, and pre-approval for a loan so that you can set a ceiling on your purchase. After that, you can go looking for a house and start making your offer.