To Buy or Rent: That is the Question

TOP article_photo by Samuel A. Love

Should I rent a home or buy a home? This is a complex question, and the answer changes depending on an individual or family’s circumstances. This answer has also changed during the last six years or so due to the housing market crash of 2008.

Prior to the crash, the answer was more often to buy to take advantage of the steady appreciation of home values, but this is no longer necessarily the case. Significant price decreases since 2008 have wiped out massive amounts of equity and have left millions of homeowners underwater—where they owe more on their mortgage than their home is currently worth. We can no longer assume a constant increase in home values from year to year.

Renting can have many advantages over buying your home. When you rent, the initial cost in Oak Park is usually just one and a half months’ security deposit, most or all of which you get back when you leave (assuming you are a good tenant) and the first month’s rent. The apartment building owner pays for property taxes, maintenance, landscaping , and homeowner’s insurance (although you should get renter’s insurance, which is considerably cheaper). In Oak Park, the building owner usually also pays for garbage pickup, sewer, water, and often heat.

Renters have much greater flexibility, fewer responsibilities, and you can take money that would be spent on mortgage interest, property taxes, and maintenance, and put it into other investments such as the stock market. According to economist Robert Shiller, stocks have risen and appreciated significantly more than home prices over the last several decades(1).

To buy a home, you generally need a lot of money saved up for a down payment—usually 20%, which comes out to $40,000 for a $200,000 home. You must also have funds for closing costs as well as thousands of dollars in reserve to pay for unforeseen problems in your new home, such as replacing the heater or the roof. You must pay property taxes and other maintenance costs yourself. Finally, when it is time to sell your home, a real estate agent charges six or seven percent of the home’s sale price. Condo buyers must pay a homeowner’s association fee, which covers yard upkeep and maintenance of the common parts of the building(s).

Buying your home certainly has its advantages as well. When you decide to buy a house you are making payments towards owning the house outright—usually on a 15- or 30-year basis. While much of the mortgage is going towards interest, especially early on, an ever-growing portion of your monthly payment will go towards the principal. This principal acts like a savings account, because it is going toward ownership of your home.

TOP article_photo by Kerri Berk

When looking to buy or rent, many people compare the mortgage payment with the amount you would pay in rent. However, to really compare, look at rent vs. just the part of the mortgage that will go toward interest (keeping in mind how much you can afford in total). Also, the interest you pay on home mortgages is tax deductible. Currently, interest rates are very low, which makes buying more favorable as you would pay less interest on the mortgage over the course of the loan.

Historically, you also reap significant financial benefits when the value of the home appreciates. While has changed during the past six years, homes are beginning to increase in value again, albeit slowly. Furthermore, when you own your home you can pass it on to your children or other close family members.

Homeowners can also improve the house and make any changes as they see fit (that they can afford) subject only to zoning laws. If you are renting, the owner can also decide to sell the building or convert it to condos (less a problem now), the owner can raise the rent, or refuse to renew your lease. As a renter, you do not have the freedom to make any major changes to your home. Furthermore, there are benefits to home owning that are not strictly economic—pride of ownership, the American dream. The length of time you are planning to stay in your home is a factor too: the longer you plan to stay, the more it favors buying.

Is it better to own or rent? In the end, it comes down to how much of your money and time you are willing to spend on your housing.

By Steve Langley, OPRHC Associate Director of Technical Assistance and Marketing

Photos by Samuel A. Love and Kerri Berk

(1) Conerly, Bill. Forbes. 11/11/2013 issue. “Should You Buy A House Or Rent: The Economics of Homeownership”.