The rent vs. buy debate has raged on for decades because there is always new information to hand for both sides of the argument. The price of property is constantly changing as is the income-to-mortgage ratio faced by prospective homeowners. The main advantage of renting is that you are never going to fall victim to foreclosure; if you can’t afford the rent, you can just move out and find a cheaper location.
However, when you own a home, you have certain privileges. Not worrying about a landlord and the freedom to decorate or renovate as you wish for example. Most people never feel ‘at home’ until they own their house. In this article, we look at 5 compelling reasons why buying a home is better than renting.
1 – It Is Substantially Cheaper
Trulia’s 2016 ‘Rent vs. Buy’ report showed that buying a home is over 37 percent cheaper than renting. Although the Federal Reserve Bank will increase rates in 2017, they will not rise anywhere near the level where renting becomes cheaper. In fact, rates must reach over 9 percent for this to happen, more than double the existing level.
Buying a home is cheaper than renting in every single one of America’s top 100 largest metropolitan areas. It is 50 percent cheaper to buy than rent in Fort Lauderdale and Miami for example. The main concern for homebuyers is rising house prices. Even so, house prices would need to increase by over 60 percent to give the advantage to renters. It is important to note that these figures relate to those who pay 20 percent down and live in the property for at least seven years. Even so, there is no long-term financial benefit to renting.
2 – A More Comfortable Retirement
As at May 2017, the mortgage rate (for 30-years fixed) is slightly above 4 percent; this is still a historically low rate. As we mentioned above, it is cheaper to buy than rent in every major metro area in the United States. While you may not find it desirable to get locked into a 30-year fixed rate mortgage at the age of 35, you will be fully paid up by the time you enter retirement.
It doesn’t even matter if you can’t afford your dream home at the outset. As your earning power increases, you can use the equity in your home to upgrade in your forties or fifties. By the time you retire, you’ll have the house you’ve always wanted and no rent payments to worry about.
According to Motley Fool, the average American retiree will spend over $3,700 a month. While Social Security covers a portion of your expenditure, not having to worry about rent is an enormous weight off your shoulders.
3 – Tax Benefits
Although the number of tax breaks associated with home ownership has decreased, there is still a lot to look forward to. At current rates, a 30-year fixed mortgage on a $300,000 property will cost you around $12,000 in interest in year one. You can deduct the interest on a second home as long as it isn’t a rental property.
If you recently bought a home and paid ‘points’ to your lender in return for an improved rate, the expense is tax deductible in the year you pay it. A point is 1 percent of the loan so, on a $400,000 loan, 1 point is $4,000.
If you didn’t have enough saved to pay 20 percent upfront, you probably paid Private Mortgage Insurance (PMI). PMI is between 0.5 and 1 percent of your home’s value, so 1 percent PMI on a $300,000 house is $3,000. If your income is below a certain threshold, you are allowed to claim the PMI payment as a tax deductible item. Other possible tax breaks include Home Office, Property Tax, and Mortgage Interest deductions.
4 – Property is an Investment Opportunity
In simple terms, owning property is one of the best ways to increase your overall wealth. It is a tried and trusted investment option and, after the Global Economic Crash, the price of housing is on the way back. House prices rose 5.6 percent nationwide in 2016 and experts predict another 5 percent increase in 2017. Although there is no guarantee that housing prices will continue to increase beyond the rate of inflation, the historical data makes positive reading.
Regardless, rent continues to increase faster than the rate of inflation so why should you pay more and have nothing to show for it? When you earn more and have money saved up, it is possible to purchase a second home and use it as an income stream. Even if you can’t afford another property, you can make money from your primary residence. You could rent out a spare bedroom or even rent your driveway space to commuters. None of this is possible when you rent.
5 – Homeowners Are Better Savers
In a phenomenon known as ‘forced savings,’ homeowners tend to save more money than their renting counterparts. Why? First of all, as they have to pay their mortgage monthly for decades, they tend to squirrel their money away safely rather than splash out on fancy clothes or expensive meals.
An interesting study of residents of Los Angeles and Orange counties in 2014 found that while 50 percent of renters spent over 35 percent of their income on rent, only 30 percent of homeowners spent the same rate on their mortgage. Admittedly, homeowners in L.A. tend to have higher incomes than renters, but it is a fascinating insight into the financial differences between owning and renting. Also, if you have a mortgage, it is possible to refinance into an even lower interest rate.
Final Words
The global financial meltdown and subsequent financial crisis gave home purchase a bad rap. However, the ensuing recovery has spelled excellent news for homeowners and bad news for renters. The current economy favors homeowners, and it looks likely to stay that way for the foreseeable future. As a result, if you can find affordable housing, take out a mortgage and join the millions of Americans that achieved their dream of owning a family home.