You’ve seen for sale signs on houses around town, and they’ve got you thinking. Maybe now is the time to declare independence from your landlord, and buy your own home. Buying a house will be the largest investment most people ever make, say personal financial planning experts at The Ohio Society of CPAs. Before you look for a house, analyze whether renting or buying at this point in time makes the most sense. The pros and cons Buying a home – pros
Buying a home – cons
- With a fixed-rate mortgage, you’ll know your principal and interest payment for the life of the loan (note: local property tax rates may change your payment over time).
- You own the property so you’re building equity, and presumably, a return on your investment if you sell.
- You can deduct your mortgage interest from your tax return.
Renting – pros
- The biggest initial expense of home ownership is the down payment. Depending on the terms of your loan, you may have to put down as much as 20% of the purchase price. That’s a big chunk of change to part with at one time.
- You’ll encounter ongoing monthly expenses such homeowner’s insurance, utilities, and general maintenance.
- Home ownership also comes with a responsibility to maintain your property, and you may need to adhere to requirements from a homeowners’ association, which may also charge monthly fees.
Renting – cons
- When you rent, you’ll likely have to put down a security deposit, but there isn’t a big initial investment.
- Rent and utilities may increase annually, but other than that you’re pretty much in the free and clear as far as expenses go. No outlays are necessary for flooded basements or new windows. That’s all up to your landlord to finance.
- When you’re renting, you can pick up and move when you’d like, according to the terms of your lease. If you’ve unintentionally rented in what turns out to be a less than desirable area, you’re not tied down by a 30-year loan or the inability to sell a house. When your lease expires, you can move on.
- Rent is pretty much money down the drain. Yes, you’re getting a roof over your head, but you’re not building equity. Your landlord gets that benefit.
- There aren’t any tax write offs available to renters. The IRS says your landlord deserves those honors.
- If you want to paint or remodel or make any changes at all, you need to clear it with your landlord first. And if you do make changes, you can’t take them with you. The next renter will get to hang on to any improvements you make.
- You’re basically at your landlord’s mercy. If he defaults on his loan, you might lose your home.
Once you’ve examined the pros and cons for your situation, there are a few other things to consider before making the final decision to buy or rent. How long do you plan to live in the area? If a job change requiring a move might come your way, now might not be the best time to buy. Selling a home can take time and involve more costs.
If you’re new to a city, take the time to get to know the area. A neighborhood that seems suited to your lifestyle now may not be to your liking in a year or so.
When you sit down and crunch the numbers, does it make more financial sense to buy or rent? There are many free calculators online to help you create and analyze different financial scenarios. Ask yourself: what do you want and what can you afford?
If you have questions about personal financial planning, contact a local CPA