Choosing where to live is about much more than just putting a roof over your head. It's a deeply personal decision that ties into your sense of security, your community, and how you envision your daily life. It is completely normal to feel torn between the freedom of renting and the stability of owning, so take a deep breath and remember that this decision is about what works best for your unique journey.
Renting offers predictability and flexibility
It's a common myth that renting is simply a waste of money. The reality is that everyone needs a place to call home, and that always comes with a cost. While monthly rent payments don't build equity, renting saves you from several expenses that homeowners face.
When you rent, you generally know exactly what you owe each month. That amount covers virtually everything you have to worry about, including general maintenance and often utilities. While there is a chance your landlord could increase the rent, that usually only happens at renewal time once a year.
If you live in a popular location, you might expect regular hikes. However, more established cities like New York City, Los Angeles, and Boston might have properties with "rent control." This limits the amount landlords can raise your monthly rent, if at all. These units are hard to secure because most tenants hold onto them tightly.
Renting also provides incredible flexibility. You have the ability to relocate when your lease ends, which is perfect for traveling nurses or people who love trying out new cities. The only downside is if your landlord decides to sell and you have to move out suddenly.
The real costs of renting
While often simpler, renting does come with its own list of expenses you should expect to pay:
- Security deposit: This is usually between one and two months' rent.
- Pet deposit or fees: If you have a furry friend, you may be expected to pay an additional fee.
- Moving costs: You will need to move your items, and there could also be an application fee during the rental process.
- Insurance: You may need or want to pay for renter's insurance to cover your belongings in case of theft, fire, or other disasters.
Owning a home allows for personalization
When you own your home, you get to decide exactly how you want it to look, both inside and out. This sense of ownership can be very good for your well-being. According to Bank of America's Homebuyer Insights Report, 93% of American homeowners feel more content than when they were renting. Additionally, 83% stated they wouldn't consider renting again.
However, moving can be quite costly because real estate isn't a liquid asset. It may be challenging to sell when you hope to, and even if you find a buyer, you might not get the price you want. High transaction costs can also put a damper on your plans.
The hidden costs of homeownership
Owning often costs more than renting, even if your mortgage payment looks lower than a rent check. There are additional expenses exclusive to homeownership that renters generally don't pay, including:
- Private mortgage insurance (PMI), typically if your down payment is <20%
- Property taxes
- Homeowners insurance
- Garbage, water, and sewer service
- HOA fees
- Home maintenance
- Flood or earthquake insurance in certain locations
Understanding mortgage interest and principal
It is important to realize that mortgage interest can consume almost all your monthly payments in the beginning. Surprisingly, if you have a 30-year mortgage, you may have to wait 13 years before a larger portion of your monthly mortgage payments goes toward your principal balance.
For example, say you have a $200,000 loan with a 4% interest rate for 30 years. In this case, you'll spend about $144,000 in interest over the life of the loan. On the positive side, you can potentially get some of that back if you itemize your taxes and claim certain deductions.
Is it cheaper to buy or rent?
By now, you can probably guess that there is no right or wrong answer. It all depends on your particular circumstances, including how much you can spend, the life you want to live, and the goals you wish to achieve.
Renting provides predictability for your monthly costs, which can give you a sense of security. However, if you're a big spender, renting may end up being more costly than owning your own home over the long run, even when you factor in the extra costs of buying.
Are homes good investments?
A home can be a wise investment that allows you to potentially build equity. However, its success depends on factors like location, economic trends, upkeep, and environmental considerations. Real estate is dynamic, and circumstances can shift at any time.
Focus on what matters most
Disregard blanket statements like "renting is throwing away money." Life circumstances are too varied for such oversimplifications.
It is also worth noting that in the past, land ownership was restricted based on race, ethnicity, beliefs, or marital status. While these practices are now illegal, issues like redlining still exist. However, buyers shouldn't be deterred. Most mortgage lenders do their job correctly by considering only the borrower's ability to make their mortgage payment on time.
Before doing anything, weigh the risks. Obtaining a mortgage often involves using significant financial leverage. While homeowners can make considerable gains if prices rise, they can lose just as much if prices fall. This is why it's important to research the local market and get quotes from multiple lenders. Shopping around could save you a significant amount on closing costs and help you secure a better APR.
The Facet difference
At Facet, we know that your housing situation is a cornerstone of your financial life. We don't just look at the numbers; we look at the life you want to build inside those walls. Our team of experts works with a flat-fee membership model, which means our advice is never influenced by commissions on a mortgage or insurance product. We're here to help you navigate these big decisions with a personalized roadmap that aligns your money with your values.
