Given the sizable overall costs involving with buying a house, most of the young people start their independent living by leasing or renting an Apartment. As youngsters, they create professional careers, save/make money or maybe start family living, part of them started to buy a better home.
When taking the decision to rent or buy a great house, there are many things to be taken into consideration. A large number of people have been renters all their lives, but are now ready to take the big leap and become a home-owner. Despite the big picture of the socio-economic forces affecting home-ownership rates, determining when and if one wants to purchase a house is a totally a personal interest that demands and depends on the careful consideration.
However, this decision generally may vary from one market to another. Also, because cultures in many countries to a certain extent idealize house-ownership, social and emotional pressures tend to impact the decision of buying vs. renting almost as much as financial concerns.
If you are a renter who is interested in buying a house, or a house-owner wondering if renting a home makes more sense, it is time to appraise the benefits, relative costs and disadvantages of buying versus renting a house. Therefore, before taking the decision of investing in real estate, it is important to consider the following pros and cons to see what is more suitable for you financially and that works best with your current lifestyle.
Advantages of Buying a Home
Buying a home can be a financially advantageous and a satisfying decision for many reasons, including the ones listed below:
As everyone has heard before; the rent paid towards a house is a wasted expense that does not help in building one’s own financial wellness. In exchange for using the homeowner’s property as your home, rent is a payment that goes to them. When we stop paying rent, we have to move on to the next apartment as if nothing ever happened and we do not build any ownership of the place we lived. On the contrary, when you buy a home, the mortgage payment is going towards the principal amount and interest.
The down payment plus the principal amount you have paid off in your mortgage will equal the percentage of ownership you have in your home. Your ownership is an asset, also called as equity. This is something that belongs to you, and a property that you have the right to sell if you wish. Even though the interest portion of the payment does not go towards increasing your ownership, the principal payments do. The monthly payments or mortgage go toward purchasing your own home whereas rent is just the money you are pouring into the homeowner’s pocket.
- Any renovation you make belongs to you
When you rent, any renovations made go back to the homeowner, and you only get to enjoy them while you are renting their home. As a homeowner, you increase the value of your property with any improvements you make to the space.
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- Tax benefits for house-owners
There are also many important tax advantages that are associated with purchasing a home. One benefits from them both at the time of purchase and on a continuous basis. The first benefit arrives the very first year you buy your own home. Regardless of who paid the loan, you are eligible to claim discount points on them. Also, going further, there are two main types of mortgage points.
Origination points and discount points. Each of these points is equal to one percent of the total mortgage. Origination points only compensate lenders. They are often negotiable and not tax deductible and not always required. On the other hand, discount points are a type of prepaid interest. It can lower the overall mortgage payment one needs to make and are tax deductible. Typically, each of these points that you purchase lowers the mortgage interest rate by 0.25 percent.
Furthermore, the interest you pay on your mortgage can be deducted from your taxable income. This can be equal to huge savings, especially in the early stages of your mortgage when interest makes up most of the payments. While one is not generally excited about paying property taxes on your new home, you are eligible to deduct these as well.
- Homeowners have more freedom and independence
There is an incredible feeling of freedom and independence that comes with owning your home. Living in your own home gives you total control over it and lets you do as you please. No one can raise your rent or kick you out. You can renovate your house and make changes that suit your taste and desire.
- Potential for Rental Income
Even if one does not consider one’s home as an investment property, you have the freedom to turn it into a source of income in a later stage. This can totally or may be partially balance your mortgage payments, insurance and tax payments on it. The most efficient way to achieve this is by renting out all or part of your property. One needs to follow all local property rental laws to do so.
You may live in one of the duplex unit and rent out the other to guests, rent out a basement bedroom to a friend or purchase and move into a second home, leaving the entire property to rent. A homeowner can also explore different ways of sharing economy and take in short term renters using house sharing platforms like VRBO and Airbnb.
Cons of owning a house
All the above being said, owning a house can also be seen as a big responsibility. Listed below are some disadvantages.
In a scenario like losing your job or wanting to move to a location closer to your new job, a house owner cannot just move to a less expensive apartment or one in a different location like you could when renting. In times of financial difficulties you are still obligated to make your mortgage payment, or you will default on the loan. If one defaults on the loan, the people lending you the loan have every right to take possession of your house.
- House owners are responsible for repairs and maintenance
House owners are needed to take care of all the repairs and maintenance that is required in the house. When renting, the landlord is responsible for a broken toilet or air conditioner. Once you own the home, you have to pay for and fix things yourself. These types of repairs can prove to be very expensive. Ideally it is better that you save up for such scenarios so that in the case of a major repair or a broken appliance, you can pay for it without getting into credit card debt or taking out more debt on your home.
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- Property taxes is also a responsibility
One cannot forget about property taxes. More often, just when one thinks that they have a handle on the costs related to buying your first home, one finds out that there are more expenses coming your way. The amount to be paid as property tax can be calculated by multiplying the property’s assessment and the property tax rate, which is generally based on your location or jurisdiction.
- Not all costs come under a home’s price tag:
There may be additional costs other than a home’s price tag when it comes to actually purchasing one. One does not quite anticipate how much would be needed for closing all costs. There are many things that pop up after one puts in their offer like bank origination fees, home inspection, and real estate transfer taxes. You want to see that money go towards the exciting stuff when you are saving for a really big purchase, like nicer building or more square footage. One really needs to leave a buffer for making all this happen.
- Potential for Financial Loss
It is considered that home-ownership builds equity over time. However, equity does not always equate to automatic profit. The appraised value of your home may be dragged down if home values in your area remain flat or decrease during your tenure as a homeowner. This may risk a financial loss when you sell. Although renting does not build equity, it does not involve the risk of owning a depreciating asset.
Although buying a home can seem as a new responsibility, it can be a very financially sound and rewarding investment. Before deciding if it makes sense for you to make such an investment one needs to consider the current financial situation as well as your lifestyle.
Attributes like down payment, monthly mortgage and repair and maintenance needs to be considered. If one plans to stay in the same place for the next couple of years or if you are willing to sublet or lease out the apartment then buying a house can be a good option.