You want the benefit of building equity, yet the interest rate question is still a bit wobbly.
At this time, it feels like a renter’s market with so many people deciding to hold off on buying due to rising interest rates and a market that seems averse to new home buyers. But one of the biggest draws to owning a home is the equity you can build. Yes, it takes a big chunk of change at the forefront of a home purchase, but once you get past that it can be very rewarding.
Any way you look at it, buying is a major decision, but let’s consider the options and look at the pros and cons of both buying and renting.
Reasons to Buy
To build equity is the most attractive advantage of buying a home. Building equity builds wealth over time. There are also tax benefits that renters do not have. Deducting mortgage interest and property taxes on tax returns is a money-saver for homeowners.
Having complete control over your home means you can make renovations without landlord approval, allowing owners to make their home the way they wish.
Reasons Not to Buy
Buying a home means higher upfront costs, such as a down payment, which can be up to 20% of the home’s purchase price. Then there are closing costs and other fees.
A high credit score can make it easier to get a mortgage with a lower interest rate, while a low credit score usually results in a higher interest rate. It’s important to check your credit score and work to improve it if needed before applying for a mortgage.
Along with homeownership comes maintenance costs. Homeowners are responsible for all repairs and maintenance on their home, which can add up quickly.
Homeowners don’t have the flexibility that renters do. If they need to relocate, they can’t easily just pick up and move. This can be a disadvantage for individuals who need to move frequently due to their job.
Reasons to Rent
Flexibility is an advantage renters have because they are not tied to a specific location and can more easily relocate, especially if they need to relocate frequently for work or other reasons.
When renting a home, the upfront costs are usually lower than those associated with buying a home. Renters typically need to pay first and last month’s rent, a security deposit, and any applicable fees.
Renters are tenants and are not responsible for maintenance costs. Landlords are responsible for big repairs and maintenance, so renters have no worries about unexpected costs.
Reasons Not to Rent
Paying out rent does not build any equity. It’s more like the renter is paying the landlord’s mortgage. It’s not a way to build any kind of long-term wealth.
Renters have no tax benefits like homeowners.
Renters are very limited to making any major changes or renovations without the express approval of the landlord. This can be frustrating for people who want to make personal touches to feel like it’s a home of their own.
Which Cost Less, Mortgage or Rent?
The answer is it depends on the cost of the home, the interest rate on the mortgage, and the cost of rent in the area. Generally, owning a home is cheaper than renting over the long term because homeowners are building equity.
Tax Variations of Owning vs. Renting
Keep these key points in mind regarding taxes:
- Tax Deductions: Homeowners can deduct their mortgage interest and property taxes from their taxable income, which can lower their overall tax burden.
- Capital Gains Tax: If you sell your primary residence for a profit, you may be subject to capital gains tax on the difference between the sale price and the purchase price. However, there are some exceptions to this rule, such as if you’ve lived in the home as your primary residence for at least two of the last five years. Renters have no worry about capital gains tax when they move out of their rental property.
- Property Taxes: Homeowners are responsible for paying property taxes on their home each year. The amount of property tax owed will depend on the assessed value of the home and the tax rate in the area. Renters do not have to pay property taxes directly, as this is the responsibility of the landlord.
- State and Local Taxes: Some states and municipalities may offer tax credits or deductions for homeownership, which can further reduce your tax burden. Renters may not be eligible for these benefits.
- Home Office Deductions: Working from home with a dedicated home office space, allows a portion of housing expenses to be deducted as a business expense. There are firm requirements for claiming this deduction, so it’s important to speak with a tax professional to verify eligibility.
Before making a decision to buy or rent, consult with Cousin James Management. Besides being a respected name in property management, we also have real estate pros to answer questions and guide you. We invite you to download our free checklist, How to Choose the Right Property Management Company to help you know what to look for to get the best results.
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