Rent Vs. Own: 7 Factors Even Homeowners Should Consider

Whether you now own or rent your home, life changes may cause you to reevaluate.

Key points

• Your future lifestyle should play a major role in your decision about whether owning or renting is best for you
• Key potential tax advantages for homeowners include the mortgage interest deduction and the capital gains exclusion (consult your tax advisor about your situation)
• Renting frees you from most of the direct costs and responsibilities of owning a home

Perhaps you’re currently renting and are thinking about buying your first home. Or maybe you’re a homeowner nearing retirement and are contemplating a new house, condo, or apartment, but you aren’t sure whether buying again or renting is the right move. There are strong lifestyle and financial arguments in favor of each option, but deciding which is best for you is ultimately a very personal choice about the way you want to live. Here are seven key considerations which, taken together, can help you weigh the choices.

1. Lifestyle factors

Lifestyle factors will play a critical role in your decision. If you own your own home, you’ll have the freedom to decorate or take on home-improvement projects as you wish. Many people truly enjoy some of the “chores” that come with maintaining their home and fixing it up just the way they’d like.

Renters, on the other hand, have a different kind of freedom: They are free of many of the maintenance responsibilities that come with homeownership. Renting also gives you more freedom to move based on your needs, for example, your career, health, or family.

For the last few years, home prices have increased faster than incomes, leaving housing overvalued on a national level.

2. Current market trends

Home values: Average home price appreciation isn’t as fast as it was during the mid-2000s, but prices have come a long way since the trough of 2012. “Home prices trend with income growth, so over the long run, home appreciation averages 3% to 4% per year, she says. “But in this recovery, home price appreciation has been considerably faster relative to the growth in income. In our view, homes are overvalued on a national level.

That could be good news if you’re already a homeowner and are looking to sell in order to downsize. If you buy now, though, you may experience a slowdown in the pace of home appreciation over the next few years, she says. “While there may be weakening over the medium term as prices return to fair value, we expect to see price appreciation average close to the historical norm over the longer term.”

3. The upfront cash you’ll need

Whether you’re buying or renting, there are one-time costs that mean you’ll need to have cash on hand.

For buying: If you plan to have a mortgage, you’ll need cash upfront for a down payment and closing costs. If you’re selling a home you own outright and want to use the proceeds to purchase another home, you’ll still have closing costs, but they will be considerably less.

In a Bank of America study, 75% of first-time homebuyers stated they would prefer to bypass a starter home and purchase a house they believe will meet their future needs, even if it means waiting to save more.

Home buying costs

Use a home-buying calculator to help you learn more about estimating monthly mortgage payments or potential closing expenses.

For renting: Upfront costs might include a security deposit — typically the first and last month’s rent — and in some cities a broker’s fee. The fee could range from one month’s rent to 15% of a year’s rent.

Whether you’re buying or renting, get tips on how to earn a good credit score. Both lenders and landlords want to see that you’re a low-risk candidate and your score — good or bad — can affect the interest rate you’ll pay on a mortgage.

4. Calculating the break-even point

Figuring out the financial pros and cons of buying versus renting isn’t just a matter of comparing a monthly rent with a mortgage payment. As discussed above, there are upfront costs involved whether you buy or rent a home. Owning a home also requires consideration of recurring costs such as property taxes, homeowner’s insurance and ongoing maintenance costs. If you own a condominium, there may be monthly association fees, which should be taken into account.

5. Tax advantages for homeowners

Among the most commonly cited benefits of owning over renting are the federal tax breaks available to those who own their homes.

• Most homeowners who have a mortgage can reduce their federal income taxes by deducting the mortgage interest they pay. Even so, a large part of the mortgage interest you pay remains an outright expense of borrowing money. You may also be able to deduct your property taxes.
• When it comes time to sell, the first $250,000 in capital gains you realize on the sale of a primary residence ($500,000 for married couples filing jointly) may be free of capital gains taxes if you qualify for this exclusion from the IRA on capital gains from the sale of your main home. That’s different than with capital gains you might realize on the sale of stocks, which would be taxable.

6. Payments might change over time

Variable-rate mortgages are of course subject to change over time. But, with a fixed-rate mortgage, you can easily budget for your monthly mortgage payment because it won’t increase over the life of the loan. You will, however, have to remember that your property tax and insurance expenses could increase. On the other hand, annual rent costs can increase, but you won’t need to think about separate property taxes.

• If you’re young, that means as time goes by and your income increases, your mortgage payment may consume a smaller percentage of your paycheck. That’s extra money you might invest for other goals, such as retirement
  or education.
• For those in or near retirement, knowing your mortgage payment, if you still have a mortgage (and it is fixed-rate), will remain relatively stable may provide greater comfort than worrying if your rent payment will increase each year.

7. The value of home equity

There are two main ways to leverage the equity in your home.

• On the most basic level, home equity gives you the option of taking out a home equity line of credit (HELOC) to have as a financial cushion in case you need the cash.
• Alternatively, if you own a home and are thinking of selling it, learn about the upside of downsizing; perhaps selling it and opting to rent would allow you to use any home equity you may have gained to boost your retirement savings. Investing that cash could help supplement your income.

Key benefits of renting

• Flexibility: It’s easier to move for work, health, family, or change of scenery
• Less responsibility: The maintenance and upkeep are the landlord’s job
• Financial simplicity: Lower upfront costs and no down payment mean a limited barrier to entry
• Investment flexibility: Not saving for and then using your savings for a down payment means you might have extra funds available to invest for other goals

Key benefits of owning

• Freedom: Freedom to renovate, landscape, and decorate exactly as you wish
• Taxes: Potential deductibility of mortgage interest and property taxes on your federal income tax form
• Reduced expenses after paying off loan: Once a mortgage is paid off, your housing expense is reduced to periodic taxes, insurance, and maintenance
• Appreciation: It’s possible your home value could increase, giving you access to more equity
• Pride of ownership: Owning a home is often described as being part of the American Dream

Ultimately, the decision of renting versus buying is a very personal one. Make sure to think through both the financial and lifestyle implications of these options, and then make a choice based on what will make you happiest.