Should You Buy or Rent?
The dramatic rise and decline of the housing market has caused people to question the conventional wisdom of owning a home at any cost. Let’s look at the pros and cons.
Renting: Flexibility and Lower Costs
Besides shelling out less money up-front (usually just lease’s first and last month’s rent plus a security deposit), renters have other advantages:
- Monthly rent is often less than a mortgage payment.
- Renters aren’t required to maintain the inside or outside of a property, and insurance costs are limited to personal property.
- You’re free to leave the moment your lease is up, so you won’t have the stress of selling in a down market.
- Funds not used for housing expenses are freed up to spend or invest in other ways, or the money can be put aside for a future down payment on a residence.
Buying: Equity and Stability
Once you commit to an area, either for the schools, commuting time or housing style, it may make sense to buy. On the plus side:
- You can develop your home and property as you please and sink roots into the community.
- If you opt for a mortgage with a fixed interest rate, your monthly payment remains the same, as opposed to the customary rental increase with the renewal of each lease.
- The interest on your mortgage is deductible for many taxpayers. So is property tax.
- With each payment, you are building equity. In a rising market, you will likely realize a profit when you sell.
Either Way Comes at a Price . . .
If you rent:
- With no equity in the home, when you leave you walk away with nothing.
- Even with rent-controlled properties, your rent costs will rise a few percentage points each year. With market rents, the landlord can raise the rent to any level.
- Although the building manager is required to do repairs, there is no guarantee they will be done in a timely manner; likewise when it comes to replacing out-of-date appliances.
- There are no tax deductions for rent payments.
And if you own:
- A substantial down payment is required—these days usually at least 10-20%, with closing costs totaling 3-6% of the purchase price. Securing a mortgage will require an extensive credit check.
- Real estate taxes can be substantial, not to mention home insurance. Landscaping and repairs are expensive too, especially for an older home.
- With a co-op, the monthly maintenance fee (in addition to your mortgage) can be high, especially in the presence of amenities such as an elevator, doormen or swimming pool. If you’re looking for income, remember that co-op owners are often restricted from renting.
- When you sell, you are responsible for realtor fees, usually about 6%, and you will have to put up with prospective buyers tramping through your property, perhaps for months. With a co-op sale, the buyer must be approved by the co-op board.
How to Choose
Consider how home ownership fits into your overall personal and financial goals. For an online calculator to assist in your choice go here: http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=1&.
This is a time when it really pays to see how things add up before making a decision.