Getting the Most out of Life
Rent or Buy a Home: The New Choice in Defining the American Dream
Your 20s and 30s are filled with life-changing responsibilities—finding a good job, finding a soul mate, finding a place to live. But when it comes to the last item, deciding whether to rent or buy a home can be a big headache. It might seem like all your friends and family members hold conflicting opinions on the matter.
How do you know if you should rent or buy a home? First, let’s look at some pros and cons of homeownership.
Pro or Con: Either Option Could Be Cheaper
Homeownership consumes more of your money than just the mortgage payment—you also pay for repairs, maintenance, insurance, property taxes, association dues, and upgrades. Let’s assume you buy a $250,000 home with a loan for $190,000 at 4.5 percent interest on a 30-year fixed loan, plus $200 in homeowners association fees, 1.5 percent value as property tax, 1 percent insurance, and 1 percent in maintenance and repairs. Your cost is $1,891 monthly. As a renter, a home valued at $250,000 could range from $1,250 to $5,000 per month in rent, depending on your area (between 0.5 to 2 percent of the value).
Con: Homeownership Makes Moving Harder
It can be a hassle to rent or sell a home, but neither is impossible. Plenty of homeowners change cities, states, and even countries, sometimes several times over in their lifetimes. In fact, around 36.5 million Americans moved homes in 2012, according to the U.S. Census Bureau. That’s 12 percent of the population.
You may want to rent if you’ll only be in the area for a short period. But if you decide to own a home, you’ll still have the freedom to move if your circumstances change.
Pro: Buying Can Be a Good Investment
If you’re looking for a solid return on your money, you’re better off buying a certificate of deposit, a money market fund, or a municipal bond. From 1900 to 2000, the real rate of return on housing appreciation was 0.2 percent (after inflation), according to RealEstate.com. However, you need to live somewhere, and renting won’t offer returns. The principal pay-down can also be viewed as forced savings.
Asking the Right Questions
Once you’ve examined the pros and cons, it’s time to weigh the following factors when deciding whether to rent or buy a home:
- Is your job secure enough for you to handle a mortgage?
- Do you mind being the maintenance person of your own home?
- How long do you plan to stay in your area?
- Do you have enough money to put down at least a 20 percent down payment on a home?
Don’t forget to look at property taxes when making this decision. Recent analysis of 2012 data reveals that property taxes ranged from a low of 0.17 percent (Caroline County, VA) to a high of 3.76 percent (Allegany County, NY) across the United States, with the average American home paying about $2,800. This can make a huge impact on your expenses. Deciding where to live is also pivotal to your bottom line. Buying or renting a home in a state without income taxes, such as Florida, Nevada, or New Hampshire, would yield more money in your paycheck that you can throw at additional monthly expenses.
One or two generations ago, the American Dream used to be considered homeownership. Things have changed since those days. Still, your dream is whatever you define it to be: the travel and flexibility of renting, the security of homeownership, or alternating between the two at various stages of life. In the new American Dream, you get to choose your own path.