For years, we have been told that owning your house is more financially beneficial than renting it. The belief was that if you obtain a home mortgage to purchase your house, you will slowly build equity. The old advice was that rent is like throwing away money, since you do not get to build equity while you live there. The recent downturn in the economy has turned that old adage on its head, however, as many consumers have lost equity in their homes due to decreasing home values.
Owning a home comes with financial responsibilities. You will have to take care of the roof, plumbing, painting, gardening, insurance and pay taxes on the property. As a tenant, you will probably want to pay for insurance for your belongings, but it will be significantly less than if you owned the home and needed to insure the entire property and your belongings. Renters do not pay property tax and usually do not cover maintenance costs. If you compare those expenses, you will pay more as a homeowner. As previously mentioned, though, as a renter you do not have any equity. Theoretically, the home mortgage payments you make each month as a homeowner (instead of renter) are building your investment via equity in the house. The adage that rent is like throwing away money is a little skewed, because you do have a roof over your head and get to benefit from living in the home. Your rent payments, however, are not put toward equity like they would be if they were mortgage payments.
If you buy a home with cash and purchase it at fair market value, a home is a solid investment when compared to renting. Most people, however, obtain a home mortgage to purchase a house. There are costs involved with having a home mortgage that do not necessarily give it a strong advantage over renting. When a consumer obtains a home mortgage, the majority of the payments each month goes toward interest. That is money he does not get back and it does not add to his equity. The percent allocated to interest decreases over the term of the home mortgage, but not significantly until the end of the term on the loan.
Determining whether you should buy or rent a property depends on your own financial situation. Analyze your budget and financial plan to determine what is best for you in the short and long term. In most cases, it is not wise to buy a home in the current market strictly as an investment. Over time, your earning potential with that same money invested elsewhere might be much better. That being said, you have to live somewhere. If you plan to be in a home for a long time, want a place to call your own, and can afford the costs of that particular home, owning may be the right choice.
Topics of interest Refinance | Home loan | Home equity loan | Refinance home loan | Refinance |