If you’re a potential first time home buyer, it’s important to weigh the pros and cons of renting or buying your residence. While buying a home allows you to build equity over throwing your money away renting, it isn’t always so cut and dry.
When Renting is Better
In certain scenarios, you might be better off renting than buying your home. Some of these situations could include you planning to move within the next five years, or if your rent is significantly below the going market rate. It could make more sense to keep paying rent while you save up for a larger down payment. You can use a home loan calculator to determine if the monthly mortgage payments make more sense than what you’re paying in rent.
But that isn’t necessarily a fair comparison either. When you purchase a home, there are other significant one-time and continuing costs that you need to factor in as well, such as closing costs, inspections, property taxes, insurance, maintenance fees and in some cases, private mortgage insurance or PMI. These expenses can add up over time and be quite significant. Make sure you factor them into your cost analysis of buying or renting your next home.
Benefits of Buying a Home
However, there are advantages to buying that are also worth considering. If you stay in your home for 15 or 30 years paying a fixed rate loan, your monthly payment will be locked in for the life of your loan, whereas your rent can be raised as long as the market will bear it. You can also write off any mortgage interest on your income taxes, which could result in significant savings.
Most importantly, you build equity in your home over time and you can borrow against it with a second mortgage or home equity line of credit. Be sure to make a thorough analysis of your monthly payments and know how much you can afford to put down on a house, before committing to any course of action.