Thursday, November 28, 2013

Renting or Buying? Which is More Frugal?

Have you ever wondered whether home ownership is for you? Perhaps renting is better? What makes most sense from a financial perspective? The answer to all those questions is not simple, as there are many factors that it entails, and it'll differ from person to person and in each situation.
In some locations and circumstances, renting is a financially sound option, better even than buying. In other locations and circumstances, buying will be the better bet.

Here are some factors that you must consider:

Pricing. Compare the cost of renting and buying in the area where you want to live. Compare the monthly fee for mortgage payments versus the monthly rental payments. Consider also the cumulative cost of renting versus buying- after 30 years, how much will you have paid in rent? How much in mortgage, including all purchasing fees? Consider that after a mortgage is paid off, there will be no more monthly housing fees, but when renting, you never finish paying for housing. In some cases, rental prices are much higher monthly than mortgage payments. In other places, rental fees are much cheaper than mortgage payments would be.

Local Housing Market: In some places, such as where I live, there is a high demand for housing, and renting in particular. In addition to this, there is no price control on rentals, which means that rental prices always go up- what the market will bear. (My first apartment's rent more than doubled in just 4 years.) In cases such as that, buying means locking in a set mortgage rate, so that your monthly fees don't go up tremendously the way rental fees do.
In other markets, it's very hard to sell homes, and the prices of houses are going down. This means that you can end up paying more in mortgage costs than your home is worth. On top of that, if you end up needing to move, if you can't find buyers easily, you can end up paying off the home in addition to rent or mortgage fees in the new place, which increases living expenses tremendously. Renting allows moves much more easily.

Expenses and Deductions: Home ownership has extra hidden costs- when problems arise, such as broken boilers, leaky roofs, piping issues, etc... the cost of fixing it relies solely on you, whereas renters are saved these costs. However, if you are handy, or willing to make do, you can lower these costs of home ownership. Home owners need to pay homeowner's insurance, but save money by being able to get tax deductions for their home.

Is home ownership or renting more frugal? It's very personal. In our situation, owning would be more cost effective, but we can't buy because the down payments required here are so exorbitant that we can't afford them. I know someone else that currently owns two homes she can't sell, in addition to paying to rent her current home in her new location. In her situation, renting, instead of buying the previous two homes, probably would have been a better choice.

If you're trying to decide whether or not home ownership is for you, speak to a representative from a bank specializing in home ownership, such as NPBS to help you figure it out.

See my disclaimer.

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