Home Sweet Home – Should You Buy or Rent?

Mortgages
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By Laura Tanner, PhD, CFP

Learn more about Laura on NerdWallet’s Ask an Advisor

You have saved enough money for a down payment for a house and know that you can afford to buy.  Is this the best use of your money?  In addition to looking at the hard numbers, you need to examine your feelings about home ownership.  There are plenty of online “rent vs buy” calculators.  What follows is a discussion of the pros and cons of buying a home to help you in your decision.

Renting – Pros and Cons

As a renter you have the flexibility to move whenever you want.  In addition, someone else is responsible for the upkeep and repairs.  To quote Ralph Waldo Emerson, “A man builds a fine house; and now he has a master, and a task for life; he is to furnish, watch, show it, and keep it in repair, the rest of his days.”

One downside of renting is that you are not building equity in a home.   In retirement, you will face the continuing expense of paying rent.  In addition, you do not have control of your living situation should the landlord raise the rent or decide to sell.

Ownership – Pros and Cons

Here is George Clooney’s take on ownership:  ”We rented homes growing up.  I went to five schools before I was in eighth grade.  … And…so, it’s one of those things that was always to me, it was a sign of making it was being able to own your own home.”  (And no, I did not have an opportunity to interview George Clooney myself).

Speaking from personal experience, there is something ineffable about owning a home.  Like Clooney, I moved extensively growing up because my father was in the Air Force.  Not only did we not own a home, we did not have furniture.  As we moved from base to base, living quarters had the basics and we just moved with our clothing and personal items.  Owning a condo provides me with a sense of stability.  Other more tangible benefits of ownership include a control over one’s expenses, building equity over time, tax breaks (mortgage interest and property tax are deductible) and the prospect of minimal housing costs in retirement once the mortgage is paid off.

One down side of home ownership:  have you noticed the similarity between the words “owning” and “owing”?  If you take out a 30 year-mortgage for $500,000 at an interest rate of 4.5%, you will pay close to $412,000 in interest (this is not counting the deduction for mortgage interest).  In addition to the mortgage, you will have property tax, homeowner’s insurance and the cost and responsibility of maintaining your home.  Imagine coming home from a trip to a message from your downstairs neighbors that their bathroom ceiling is collapsing because of your leaky toilet!  (This happened to me).  Another potential negative: if you lose your job, you are still help responsible for mortgage payments.

“Rent vs Buy” Calculation

The discussion so far has been qualitative.  You can also take a quantitative approach using one of the many available online calculators.  Here are some of the factors to consider:

1. Purchase price of home vs. cost of renting comparable property in your geographical area.  If it is much cheaper to rent than buy, it might make financial sense to rent.

2.  The length of time you will be living in the area.  If you plan to live in an area for only several years, it will be difficult to recoup closing costs (from purchase) and commissions (from subsequent sale).

3.  Your marginal tax bracket.  The higher your tax bracket, the greater the deduction for mortgage interest and property tax (and savings on the cost of homeownership).

The Bottom Line:  Whether to buy or rent is a complex decision.  Another interesting read is a column in The Motley Fool, which discusses data from the Federal Reserve Board’s Survey of Consumer Finances on relative net worth of homeowners vs renters.