Consider pros and cons before deciding whether to rent or buy
Homeownership is a large component of the American dream. For many it's a status symbol that tells the world that you're on your way to building wealth. Many millennials are now reaching an age when they're seriously thinking about making that element of their dream come true. But buying a home is a financial decision that should be examined carefully.
"Some people blindly believe that buying is always a smarter option," says Rana Nissan, Real Estate Loan Officer, at the Consumers Credit Union, based in Lake County with service centers in Lake County and Northwest Cook County. "They're told that buying builds equity while renting is like throwing their money down the drain. But that's not always the case."
While there are many benefits to owning a home, renting may be a better decision for some people. It's a choice that depends on a number of individual factors. Here are a few factors to think about when trying to decide if you want to rent or buy.
Buying usually protects you from having your standard monthly payment increased. While traditional mortgage payments remain constant, renters often experience annual increases. However, buyers also need to calculate certain factors into their monthly payment such as the cost of maintaining their home, property taxes and home insurance. Renters don't need to worry about these issues. If something breaks down, they call their landlord. Also, landlords pay for many utilities such as water, sewer, garbage and in some cases even heat and air conditioning.
Investment & equity
Many financial experts will caution you against buying a home solely as an investment. Real estate market increases are traditionally slow. But the argument for homeownership can be persuasive, especially for people who plan to live in an area for many years -- usually at least 10. Also, a mortgage acts much like a forced savings plan, allowing you to build equity. Accumulating substantial equity in your home can become a cushy safety net for retirement. In essence, the longer you plan to stay, the stronger the argument for buying. However, if you don't want to make a long-term commitment to a certain geographic area, some financial experts recommend renting and investing in the stock market instead. This means having the discipline to invest money that you would otherwise have placed as down payment for a home. Historically, the stock market has shown much higher returns than the housing market. But keep in mind that you'll be expected to pay capital gains taxes and that stocks are generally riskier than the housing market.
Your credit score is a large factor when deciding if you should rent or buy. As a general rule, if your credit score is lower than 660, you may not even qualify for a mortgage. It's not impossible, but gets more complicated. Also, while a specific credit score doesn't guarantee a specific mortgage rate, it does have a fairly predictable impact on the type of mortgage rate you'll receive. In a nutshell, a better credit score generally means a better rate. According to smartasset.com, an excellent credit score (760-850) will likely get you the lowest rate available while a poor credit score (580-620) will seriously affect your interest rates -- possibly 2 to 4 percent higher than the lowest available rate. So if your credit isn't that great, renting is a better option. Creating a history of on-time rental payments will help you build the sort of credit you'll need to qualify for better mortgage rates.
Buying is a much larger financial commitment then renting and ties you down to specific geographic location. If you think that your career may require you to move in the near future or you suspect that your employment situation is unstable, renting may be the way to go. Renting allows you to pick up and move fairly quickly without many financial obligations, expect perhaps a small penalty for breaking your lease.
People hate paying taxes. Renters have the luxury of avoiding property taxes. On the flipside, buying entitles home owners to tax deductions. You can deduct the interest on your mortgage, along with your annual property taxes and a few other expenses, on your federal income taxes. These benefits are generally worth more to taxpayers in higher-income tax brackets.
Freedom of expression
If you buy a home, you're free to remodel and decorate it to your liking. You can paint checkers on the walls and put the carpet on the ceiling if that's what your heart desires. Renters don't have that freedom. They're stuck with whatever carpeting, wall color, cabinets, fixtures and floor tiles the landlord has chosen. In some cases, they're not even allowed to hang heavy frames on the walls.
Maintenance issues often require landlords or their contractors to enter your rental unit. In most cases, your landlord will give you notice -- unless it's an emergency. Your landlord does not require your permission, nor is his schedule necessarily convenient for you. If you own your own house, you don't ever have to worry about the landlords checking up on you or entering your home without permission.
This article is sponsored by Consumers Credit Union.
For more information, contact Rana Nissan, NMLS#1180478, at (847) 672-3419.