The Weight of a Home: How to Discern Whether to Rent or Buy
Deciding whether to rent or buy a home is a significant financial and personal milestone. This decision should be guided by your current financial stability, long - term goals, and the specific needs of your lifestyle.
The Case for Renting: Flexibility and Lower Risk
Renting is generally the better option for those who prioritize mobility and flexibility. Most rentals require a one- year lease and a damage deposit (typically equal to one month's rent), making it easier to relocate for a new job or personal change. It is important to review the lease for penalties that are assessed for breaking the lease.
A major advantage of renting is freedom from maintenance costs. If a landlord fails to repair or replace broken items, the renter has the option to move once the lease is completed. Additionally, renting provides a monthly payment, protecting the tenant from the unexpected costs of home repairs. If you are currently managing significant car payments or student loans, renting may be a safer choice to avoid overextending your finances or ruining your credit score.
The Case for Buying: Building Wealth and Equity
Buying is often a superior decision if you plan to stay in one location for longer than 5 years. This duration allows you to build significant equity. Historically, property values can double every 10-12 years, making a home a powerful engine for building wealth- provided the property was purchased at a fair price.
Other advantages of homeownership include:
Tax Benefits: The ability to deduct mortgage interest and property taxes on your federal income tax.
Creative Control: You can make personal changes that add a "personal touch" to the home while simultaneously increasing the property's value. Paint walls, move walls, install new cabinets, any improvements that you personally enjoy. Caution: Be careful not to undertake projects that will jeopardize your cash flow.
Long- Term Ownership: After years of making payments, the house belongs to you entirely. For younger buyers, setting up a 15- year amortization schedule rather than a 30- year one is highly recommended. While the monthly payments are higher, the amount saved in interest over the life of the loan becomes a massive financial asset.
Financial Strategy and Mortgage Planning
Before committing to a purchase, you must ensure you have a steady income. Failing to pay a mortgage on time can ruin your future credit. While banks typically require a 5%- 20% down payment, attempt to make as large of a down payment as possible. Also keep in mind that you will have additional closing costs on top of the mortgage of 2%-5% of the loan and a mortgage insurance until the loan is at 80% of the original loan amount.
When selecting a loan, a fixed- rate mortgage is preferable to a flexible rate, as it protects you from interest rate variations during the life of the loan.
Due Diligence Before You Buy
A home is a massive investment, so thorough research is essential. Always investigate the neighborhood to understand crime rates or other unpleasant factors. The neighborhood will have a major impact on the future value of your property. One practical tip is to assess the property immediately after a major rainstorm. This helps you identify if the property sits in a low area prone to regular flooding, which could lead to expensive headaches down the road.
I recommend doing an inspection of the property's structure to evaluate the property's foundation. Request a termite inspection as the pests can cause silent, extensive damage to the home's framing. Make certain the roof, HVAC, plumbing and electrical systems are not near the end of their life span and in good working order.
Finally, have a title search of the property to make certain there are no liens or legal disputes on the property.
Terry Munday served for 20 years as Vice President for University Advancement at Indiana Wesleyan University in Marion, Indiana. Known for his creative, self-taught approach to fundraising, he is the author of two (soon to be three) books reflecting on the importance of stewardship, giving & finances. For many, he is the go-to for questions about financial wisdom and responsible home-owning.
Terry and his wife, Linda—both Ohio natives—have been married for over 40 years and live in Marion, Indiana. He a beloved father, grandfather and friend.