To rent or to buy? Why buying a home isn't always the best choice.

You have saved enough money for a down payment for a house and know that you can afford to buy. But is it the best use of your money? 

Gene J. Puskar/AP/File
A 'for sale' sign in front of a house in Mount Lebanon, Pa. Even if you can afford it, purchasing a home may not always be the best financial decision.

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.

Learn more about Laura on NerdWallet’s Ask an Advisor.

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to To rent or to buy? Why buying a home isn't always the best choice.
Read this article in
https://www.csmonitor.com/Business/Saving-Money/2014/0501/To-rent-or-to-buy-Why-buying-a-home-isn-t-always-the-best-choice.
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe