Rent or Own? That is the question

According to the Rent vs. Buy calculators, and sites such as Trulia and Smart Asset, even considering the cost of the 20% down payment and paying interest (currently in 3-4% range), including the costs of maintenance and upkeep, buying is still less expensive than renting after 2 years; the longer you stay in the home the wider the savings gap of buying vs. renting.

Homeownership has always been considered the gateway to the middle class and a benchmark of the American Dream. However, many families have chosen to find domestic bliss without paying a mortgage in recent years. They are missing some big “bang for their buck” benefits of homeownership that just can’t be replaced by renting.

Research shows that owning your own home has some incredible advantages over renting, especially when it comes to building your net worth and providing a stable environment for your family. If you’re sitting on the sidelines of the white picket fence debating whether to rent or buy your next home, read on.

 IT’S CHEAPER THAN RENTING

Although at the outset, buying is more expensive, it can actually be cheaper than renting in the long term if you play your cards right. According to real estate websites and calculators, homeownership is about 38% cheaper on average than renting nationally. Their calculations are based on a traditional 20% down, 30-year fixed-rate mortgage. They compared the total costs of homeownership (including maintenance, taxes, and insurance) to the total costs of renting for the same period of time.

They attribute the drastic difference in costs to the rising costs of rent and the low fixed-rate mortgage rate, which currently sits at 3.75%. That’s not to say that buying a home isn’t expensive – you’d still have to come up with the down payment, typically 20% or pay mortgage insurance that would eat into your overall savings. The fact is by paying more up front on your own home, you can actually save money in the long run.

IT FORCES YOU TO SAVE

Speaking of that 20% down payment, anyone who has had to save money for a large purchase knows that it takes discipline to budget properly so that you can reach your goals faster. Many experts argue that homeowners are more financially responsible because they’ve made the effort to save money for the down payment on their home.

Some surveys have been conducted that indicate that homeowners are in better financial shape because they exhibit better money habits. For example, 65% pay their credit card balances each month, 25% try to pay more than they’re required to on their mortgage, and 44% pay all their bills and are able to save money, too. If you ever need an excuse to save, saving for your dream home should be enough motivation to get your act together.

YOU CAN BUILD EQUITY

This is one of the most significant benefits. Building equity, which is your share of the value of your home. In more technical terms, it’s the difference between the market value of your home and the amount that you still owe. If you pay 20% down on a home that costs $200,000, you would owe $160,000 and your equity would total $40,000 (the interest you’ll pay doesn’t factor in to this equation). Pretty straightforward, right? However, if your home appreciates in value, your equity increases even though the amount you owe does not.

IT INCREASES YOUR NET WORTH

Home-ownership is more than just the American Dream, it’s also an effective way to build one’s bottom line, or Net Worth.  Sure, business acumen and investing know-how are other ways to build wealth, but for the average Joe, home-ownership has been the most tried and true method of building net worth. You can calculate your net worth by subtracting your financial liabilities from your assets, which include investments, savings, retirement funds, home equity, and other valuables.  Many financial experts estimate that housing accounts for approximately 67% of the average American’s total wealth. Unless you’re consistently saving and investing your money through other means, which is highly advised as a wealth building practice in general, a house can serve as a way to store your wealth and build your net worth.

YOUR HOUSE CAN APPRECIATE IN VALUE OVER TIME

Economist Stan Humphries estimates that the average house appreciates in value around 3.5% each year, but some areas experience steeper increases.

When deciding on your future home, it would be best to avoid areas with a high traffic volume, foreclosures, and crime because your home could lose value. However, qualities like good schools, “up-and-coming” neighborhoods, local employment, and even how close it is to the neighborhood Starbucks are signs that your new house could end up being worth more than its buying price. All the information you could ever want to know is available on sites like Rentals.com and by going to Google with keywords like “crime rate” followed by the zip code or neighborhood name. Why you can even discover the number of expected rainy days in that area.

IT’S MORE STABLE

A study compiled by researchers with the National Association of Realtors shows that homeowners move less frequently than renters and stay in their homes for longer periods of time. Between 2010 and 2011, only 4.7% of homeowners relocated, but 26% of renters ended up moving, with many citing housing-related reasons.

Have you ever wished you lived in one of those idyllic neighborhoods where you can borrow sugar from a neighbor and share a homemade pie with another neighbor?  Researchers further theorize that homeowners are more invested in their properties, and thus, their neighborhood, which makes for a more stable and close-knit community. In areas with a high turnover rate, it’s hard to know your neighbors, much less trust them to pick up your mail or feed your cat when you’re on vacation. For those looking for stability and a neighborly ambience, homeownership might offer them what they’re looking for.

One study found that home-ownership gives residents a platform to connect with neighbors and increases their social capital. The reasons are simple – as a homeowner, you have a greater stake in your community and have the time and incentive to get to know your neighbors on a more intimate level.

YOU’LL FEEL MORE SECURE

You won’t find homeowners desperately looking for housing after receiving an eviction notice. Unless the bank forecloses on your house, your home is yours until you decide to sell it. Each state has its own laws on tenant evictions, but in many cases a landlord can evict a tenant even when the tenant didn’t do anything wrong. For example, in California, landlords can evict tenants if their family wants to move into the property or if they want to sell, destroy, or repair it. Being a homeowner means that you’ll never have to move because of factors outside of your control.

IT’S PRIVATE

Do you really want your neighbors to hear your child’s morning meltdowns? Do your neighbor’s TV sitcoms frequently keep you up at night? As any renter can attest to, sharing walls with other tenants can be awkward at best and annoying at worst. Aside from noisy neighbors, renters also have to deal with meddling landlords who have access to their private space. Even though some 35% of rentals are single family dwellings, there is still no freedom from the landlord or his whim to live in, sell or tear down his property, leaving you at the mercy of situations you have no control over. The privacy that homeownership can offer is priceless.

A PART OF YOUR MORTGAGE PAYMENT IS TAX DEDUCTIBLE

Owning your own home comes with more responsibilities and expenses, but the good news is that some expenses are tax deductible. Property taxes, private mortgage insurance premiums, energy-efficient additions to your home, and the interest that you pay each month on your mortgage can all be deducted from your taxes. Although you’re on your own when it comes to maintenance and repairs, at least those tax deductions are a benefit that renters don’t have.

YOU CAN CREATE YOUR DREAM HOUSE

As a renter, you’re basically living in somebody else’s home and are subject to their rules and decorating whims. Want to install a shelf in your bedroom for your book collection? Better ask permission. Want to change the color of the living room? Forget it. Want to knock down a wall to make more space for your entertainment center? Not going to happen.

When you purchase your own home, you have more control over the redecorating and remodeling. In the survey, 89% of renters said that being able to redecorate their living space would be a perk of owning their own home. If you fantasize about customizing your dream house, purchasing your own home is the only way to make that dream happen.

YOUR MONTHLY MORTGAGE PAYMENTS WON’T INCREASE WITHOUT YOUR SAY-SO

If you’re a homeowner in an up-and-coming neighborhood, then congratulations – your home will probably appreciate in value in the coming years, which will by default increase your equity. If you’re a renter in an up-and-coming neighborhood, then you better brace yourself for the rent hikes that come with increased demand for housing.  The Rent Monitor put out by Trulia shows that rents increased by an average of 6.5% nationally last year, but larger metro areas experienced even sharper increases.

When you purchase your own home, your monthly mortgage won’t deviate too far from your first mortgage payment, although the percentage that goes towards interest and the principal will change over time. Other factors that may increase your monthly mortgage payment are local property taxes (which you have little control over) and home insurance premiums. However, as a homeowner, you definitely won’t find yourself in the predicament of a landlord raising the rent and you having no control over it.

YOU CAN TAKE OUT A SECOND MORTGAGE FOR AN EMERGENCY

Your house is an investment and is most valuable when you’re paying off your mortgage and building equity. However, if you ever find yourself in dire straits, taking out a second mortgage on your home is an option that you would never have as a renter.

YOUR KIDS WILL PERFORM BETTER IN SCHOOL

Researchers have found a positive correlation between homeownership and children’s academic achievement. Because most homeowners stay in their homes for a longer period of time, they provide a more stable home life for children, which, in turn, affect their academic performance. Researchers Lisa Mohanty and Lakshmi K. Raut found that children who change schools too often perform worse in school, which is probably due to adjusting to a new environment, new curriculum, and different academic standards. In a study published in the Real Estate Economics journal, they found that children of homeowners performed 9% better in math and 7% higher in reading. While renters can attempt to provide the same stability for their children, some factors may be out of their control because they live in properties that aren’t their own.

The stability of homeownership doesn’t just affect children’s academic achievement – it can also affect their behavior. In the same study cited above from the Real Estate Economics journal, children of homeowners exhibit 1-3% less behavioral problems than children of renters.

The importance of stability on children’s emotional well-being can’t be underestimated. The change in environment and separation from their peers that comes as a consequence of changing residences and schools can lead to behavioral problems. Renters and homeowners can try to manage their children’s emotional distress that comes from relocating, but homeowners have more control of when they move and under what circumstances.

YOU’LL FEEL BETTER ABOUT YOURSELF

Kids aren’t the only ones who benefit from home-ownership. Homeowners themselves often feel more at peace and in control of their environment when they own their own home. In a study conducted by University of North Carolina, it was discovered that the sense of control that homeowners gain when they own their own home contributes to their positive mental health. In the Freddie Mac survey, even renters admitted that home-ownership has psychological benefits. 91% agreed that owning one’s own home was something to be proud of, and 76% said that it was a sign of success. Renting from someone else can be frustrating and dis-empowering, but home-ownership can give one a sense of accomplishment and pride. 

YOU CAN HAVE PETS

If you’re an animal lover, your desire to have a furry companion may be thwarted by strict renting rules. Landlords may be flexible when it comes to birds and fish, but dogs and cats are often deal-breakers for more demanding landlords. According to an Apartments.com study, 72% of renters are pet owners, and two-thirds of them have had problems finding housing that accepts pets. Renting with a pet can also get expensive - more than 50% of pet owners were required to pay more than $200 annually on their pet deposits. The American Humane Association survey reveals that the number one reason that pet owners give up their pets is because of “moving,” which suggests that many could not find housing to accommodate their pet. Owning your own home is a surefire way to provide Fido or Whiskers a forever home.

YOU’LL LIVE IN BETTER HOUSING

After years of being rented out to a long line of tenants, a rental property is bound to see some wear and tear. Although it’s the landlord’s responsibility to maintain the property, some damage might slip their notice or be out of their control because of bad tenants. Also, the degree to which they are required to maintain the property is not likely the same degree you would like the home maintained; another example of having to live in circumstances that are beyond your control. Research shows that homeowners most often take care of their property more than renters because they see their homes as an investment. Similarly, neighborhoods that have more homeowners are in better shape than communities with a high turnover rate, since people who live in a neighborhood for a longer period of time are more invested in the maintenance, safety, and aesthetics of their communities. Although as a homeowner you’ll be responsible for the maintenance and upkeep of your property, at least you’ll have control over your standard of living.

YOU’LL HAVE SOMETHING TO PASS ON TO YOUR CHILDREN

A parent’s financial success can determine what school their children attend, the peers their children grow up with, their educational opportunities, their college prospects, their future career prospects, and their ability to grow wealth as adults. In a study published in the Journal of Housing Economics, researchers found that children of homeowners earned more as adults and were more likely to own their own home in the future. If parents invest in their homes and build their net worth, it can greatly affect the outcome of their children’s lives.

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