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Own or Rent*

You were told that Buying was better than renting, so you bought a house. Things change… It didn’t work out like you planned. Here is a look at Owning versus Renting from the Homeowners perspective. There is a great tool at the end of this page (Provided by the New York Times) that will assist you in looking at the financial cost or Owning vs Renting.

Renting versus Buying

For most people, owning your own home is a better financial decision than renting… If you can afford it. The easiest way to look at this is for a home owner, the monthly mortgage payments you make go toward paying down the amount you owe, and at the end of 30 years you own a house outright (If you never refinanced). On the other hand, if you rent, the monthly payments you make go to your landlord, and even if you rent for 30 years, you never end up owning the real estate you occupy.

But, that argument oversimplifies a much more complicated decision. Other things you need to look at include:

Ø Mortgage payments are usually higher than rent payments. You may not be able to afford a mortgage.

Ø Homeowners with mortgages pay interest on the amount of the mortgage to a bank or other lender. Because you have incurred no debt, you owe no interest if you rent.

Ø Homeowners must bear all of the positive or negative effects of home value fluctuations. If the home value rises, an owner receives that value. If the home value falls, the owner bears the loss.

Ø To protect against losing money, experts recommend new home buyers plan to keep the home for at least seven years. This assumes you start the 7 years with a loan amount less than the value of your house. So… Start the 7 years from any point in the future when you feel your home value will be MORE than you owe on your loan. (7 years might turn into 15 or 20 years for you.)

Ø Homeowners are responsible for maintenance and insurance. Landlords bear these costs on rental units. (How long is the list of things you need to do to maintain your house…?)

Ø Homeowners pay property taxes, but also receive a tax deduction for those taxes and the mortgage interest they pay.

Ø Renters have the ability to move without paying all of the expenses involved in selling a home.

Ø Mortgage payments can be a form of forced savings. By making mortgage payments over the life of a mortgage, you eventually will pay off the mortgage and own the property outright. Thus, you have forced yourself to save the principal value of the mortgage. (Assuming home values do NOT go down after you buy.)

Consider these factors when deciding what to do next. The importance of each of the above factors varies for each person. But, for many people, (who do not already own), the biggest consideration is the forced savings aspect of home ownership. Unfortunately, the forced savings does not apply to current homeowners who owe more than their house is worth. What could be seen as forced savings, is really payments to the bank for lost equity… The “forced savings” doesn’t start until your house is worth more than you owe.

Own versus Rent

This information assumes you currently own a house, and you owe more on your loan than the value of your house. Start by deciding how many more years you planned to stay in your house, and follow the instructions below.

Own vs Rent Calculator (Compliments of the NY Times)

Ø Enter the amount you owe as the “Home Price”

Ø Enter $0 for the “Down Payment”

Ø “Rent Amount” is what it would cost you to rent a house just like yours.

Ø Mouse over the “# of Years” in the graph to get a detailed breakdown.

Ø Click on “Advanced Settings” if you want to get in deeper.

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*This page is a list of observations that may or may not apply to your specific situation.

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