What's better -- renting or buying? There's no universally correct answer to this question, but one option may be a much better choice for you. For my family, homeownership was a no-brainer. Here are five of the top reasons we decided to buy our home, and how to determine whether or not you may be ready to buy yours.
Location, location, location
Regardless of whether renting or buying is cheaper -- it actually varies from market to market, and depends on several factors -- there are some locations where it's next to impossible to rent a house.
We knew where we wanted to live. Our neighborhood is located in a great school district, has a pool, is right next to a major lake, and is close to our family and friends. And it has a sense of community that seems to be getting rarer and rarer.
The problem is that out of the 100-or-so houses in our neighborhood, all but a couple are owner-occupied. There is virtually no rental market where we wanted to be, and that made our decision to buy a much easier one.
Freedom to customize
My wife and I love the idea of making our home "ours." When you rent, it can be extremely difficult, if not impossible, to customize your home and make improvements. Many landlords won't even let you paint the walls.
On the other hand, if you own your home, the sky is the limit when it comes to customization. Want to build a fence so your dog can run around? Go for it. Is your dishwasher outdated, leaky, or ineffective? If you own, you don't have to wait for your landlord to replace it, and you can pick the new one yourself.
We aren't going anywhere anytime soon
In order for home ownership to make sense, you'll probably need to stay put for at least a few years. While you don't pay any real estate commissions when you buy a home, you'll probably pay around 6% when you sell.
So, if you pay $250,000 for a house, you'll need to sell it for almost $266,000 just to break even. Since real estate prices have historically risen by about 3.5% per year, you should be able to break even after about two years. However, since the housing market is somewhat unpredictable, plan on staying put at least 3-5 years. Otherwise, you're probably better off renting.
I'm not planning on moving anytime soon. We chose our home with the specific thought that it would be a great place for our children to grow up, so we're not worried about the cost of selling.
A great time to buy our "forever" house
When my parents bought my childhood home in 1982, their mortgage had an interest rate of 18%. They didn't have bad credit or anything like that -- rates approaching 20% were common in the early 1980s.
We've all heard how low mortgage rates are, but this really puts it into perspective. Today's 30-year fixed-rate mortgage rates are about 3.5%, and they are unlikely to get much lower. This means that you can finance a $200,000 home with 20% down for a monthly principal and interest payment of $718. At 18% interest, that payment would more than triple to $2,411.
Now, I don't think 18% mortgage rates are going to make a comeback anytime soon, but I don't think 3.5% rates will stick around forever either. So even though we don't need all of the space in our house just yet, we're a growing family and decided to lock in a cheap rate and buy our forever house.
Other financial considerations
Even if buying a home costs as much or more each month than renting, there are other financial considerations to take into account. Obviously, owning your home allows you to build equity over time -- if you get a $200,000 30-year mortgage at 4% interest, your monthly principal and interest payment will be about $955.
However, keep in mind that $288 of your first mortgage payment will go toward paying down the principal -- effectively putting money back in your pocket. Furthermore, because of the way loan amortization works, the amount of principal being paid off each month will increase over time.
In addition, there are numerous tax benefits to owning your home. If you itemize deductions, you can write off your mortgage interest and property taxes each year, as well as any mortgage insurance you pay if your income is under a certain limit. Here are some details about these and other homeownership tax breaks.
The bottom line is that even if it's more expensive to buy, it could still make good financial sense over the long run.
It's not for everyone
Admittedly, there are some good reasons for renting. I already mentioned that if you don't plan on staying in the same place for more than a few years, you're probably better off waiting to buy until your situation becomes more permanent. Or if you don't want to worry about the uncertain expense of home maintenance, renting can be the better option.
The point is that some people are better off renting, while others can benefit greatly from homeownership. I just happen to be in the latter group.