Everyone needs a place to lay their head at night. But while shelter might be a basic human need, it’s not something that comes cheap. To enjoy a beautiful home, you’ll have to pay. And when it comes to how to pay for your home, there’s plenty of debate as to how you might best go about it. You have two basic ways to get a home, of course: renting and buying. When you buy a home, it’s yours — but you’ll most likely have to take out a huge loan to do it, and you’ll be on the hook for all kinds of maintenance tasks and other burdens and expenses. Renting, on the other hand, has challenges of its own: You’ll have limited power to alter and improve your space, and you’ll leave your rent payments behind when you move out, taking no value from the real estate you helped fund for however many years. Both renting and buying have their pros and cons, but which is better? Let’s explore the question.
The case for buying your home
The conventional wisdom on the renting-versus-buying debate is simple: Buying is better. That’s an oversimplification, of course, but the traditional logic leans in this direction. The reason that buying a home is often considered to be the wiser choice lies in the difference between rent and mortgage payments. To buy a nice home, you’ll almost certainly need to take out a home loan. That means you’ll be paying every month, much as you would with rent. But while rent goes in your landlord’s pocket, mortgage payments go toward your debt on your home. Eventually, you may pay the whole mortgage off; at that point, you won’t have to make monthly payments anymore. And if you ever move and sell your home, you’ll likely get much of the value of your mortgage payments back. In short, a home you buy is a store of value, and that means that mortgage payments can contribute to your net worth in a way that rent payments never can. If you’re lucky, your home may even increase in value over the years. Increasing real estate prices are not a good thing for renters (who may see their rents go up), but they can be great for homeowners; while real estate tax payments may rise, the homeowner’s net worth will be going up, and they may even make a profit when the home is sold.
The case for renting your home
With all of these points in favor of buying, why would you ever rent a home? The case for renting instead of buying hinges on two things: the down payment and closing costs. When you buy a home, you don’t just start paying a mortgage. First, you have to put some cash in as a down payment — often 20 percent of the home’s cost. That’s a big chunk of change, and if you don’t have enough, renting may be your only real option. It’s also important to remember that this cash could do other things for you. If you put all of your money into a house, you won’t be liquid, and will be vulnerable to financial emergencies. And a down payment could be invested instead of put toward a home; depending on how the market does, you could offset your rent payments and come out ahead. The down payment is a judgment call, but the closing costs argument against buying is pretty basic. The idea is this: When you buy a house, you pay a big chunk of change to cover one-time closing costs. Collectively, these costs can be as high as 5 percent of the value of the mortgage. If you turned around and sold your home the next day, you would lose money. You might get what you paid for the house, but the closing costs would be gone forever. If you wait decades to sell your house, however, you’re likely to come out ahead. Those advantages mortgage payments have over rent will have added up to far more than the closing costs. So the decision on whether or not to buy a home often comes down to the question of how long you’ll be staying there. Moving soon? Then you should rent. Settling down? It’s often better to buy. Other reasons to rent include high costs associated with taxes and maintenance. As always, do the math on your specific situation. What this means for you is that you’ll likely want to do some math before you decide whether to buy or rent your home. Happily, a lot of calculators online may be able to help you out. Make a careful decision, and do whatever is best for you.