Maybe you’ve been offered a job in a new location, or your current living situation is simply not working for you. You might be moving out on your own for the first time. There are many situations that will lead you to look for a new home.
One of the first choices you’ll have to make is whether to rent or buy a home.
Buying and renting both have Pros and Cons, and there are many factors to consider when making your decision. Here is a guide to help in your decision-making process.
Table of Contents:
1. The Process of Renting a Home
When you find a desirable rental property, contact the landlord or management company to schedule a tour.
When you visit the home, bring a checkbook, ID, a recent pay stub, and—if you’re particularly proactive—a copy of your credit report. You should also have contact information for any past landlords, your employer, and a couple of friends. Any of these could serve as a reference.
If, after visiting the home, you decide to go forward, you’ll fill out a rental application and pay an application fee (this is where the checkbook comes in). Typical application and per-occupant screening fees might cost you $35 to $75.
You may be asked to provide references and to give permission for a criminal background check and/or a credit check. You will also need to provide supporting documents to back up your application. If you’re well prepared you may already have these documents on hand.
After you submit all the required items, you will wait for approval. This can take up to a week.
In the meantime, the landlord may do a background check and credit check, look into previous rental relationships, and process your proof of income. If your credit score is low, the landlord may require you to have someone cosign the lease. The cosigner becomes liable for paying the rent if you can’t (or don’t).
Once your application is approved, you’ll be charged a security deposit. The security deposit can be a fairly large sum of money—up to a full month’s rent paid upfront. The landlord will hold the money until you move out, at which point it will be used to pay for damage to the rental unit, if necessary, or any other amount you owe before the remainder is returned to you.
Finally, you will sign the lease, which will specify the date on which you can occupy the property.
One more task is to apply for renter’s insurance. While some landlords will require it, other times it is optional, but it covers loss and damage to your belongings for a small amount per month—$12 is typical.
Then all that’s left is to move in.
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2. The Process of Buying A Home
The first step to buying a house is saving up for a down payment. While 20 percent is considered standard, there are ways to buy a home with as little as five percent down, including government programs and paying for private mortgage insurance. The more money you put down, the less interest you will pay over the life of the mortgage.
Next, you’ll evaluate your finances and credit history, then apply to get pre-approved for a mortgage. You’ll meet with a mortgage lender who will look at your credit report, debt to income ratio, and assets. The lender will use this information to determine how much you can borrow, which will tell you the maximum home price you can afford. Then you can find a real estate agent and shop for a home.
When you find a home you want to buy, you’ll make an offer to purchase it. In most cases this is the first step in a back-and-forth negotiation process with one of two outcomes: you’ll be back to the starting point, or you’ll have a contract to purchase the property.
The period from contract to closing typically takes around two months. The first step is to schedule an inspection, which will find any major problems and recommend repairs. Your lender will ask for a third-party appraisal, the purpose of which is to confirm that the home is worth the amount you’re paying for it.
This is also the point where the title company and insurance company get involved. The title company will make sure that the seller has a clean title to transfer to you. You’ll choose your own insurance company, and you’ll typically have to show proof to the bank that the first year’s insurance premiums have been prepaid.
The last step is closing day. You’ll sign a lot of paperwork and produce the down payment (typically using a cashier’s check from your bank). Your team will calculate the closing costs and fees associated with the sale (including the title search fee, the real estate agents’ fees, loan origination fees, etc.), which you will pay or have rolled into the loan. Finally, you’ll get the keys and the property will be yours. Then you can move in.
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3. Pros of Renting a Home
Because you don’t have a down payment or interest on a loan, renting a home can cost less upfront. The lower initial costs (and sometimes lower monthly costs, depending on the market) may allow you to live in areas that you would not be able to afford otherwise.
Another major benefit to renting is that the landlord is responsible for maintenance. Since you don’t own the building or rental unit, you need only contact the landlord to get things fixed.
Most of all, renting gives you flexibility. It is a great way to get a taste of an area before committing to buying a home. The flexibility also gives you the chance to move away from problem neighbors or closer to a potential job.
If you’re not ready to make a big commitment, renting may be the best option for you.
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4. Cons of Renting a Home
Renting a home can be unpredictable. Rental rates can change unexpectedly, and in most cases a yearly increase is standard. Your landlord can choose not to renew your lease for various reasons, forcing you to move out on their schedule rather than your own.
In a rental property you have less freedom to make the space your own. That may mean you are not allowed to paint walls or change out light fixtures, or you may not be allowed to have a pet. If you rent a unit in a multifamily building, your shared walls can be a nuisance.
Financially, the biggest drawback to renting is that you do not build equity in your home. When you move out, the money you’ve paid in rent gains you nothing going forward.
Finally, the government provides various tax incentives to encourage citizens to own their own homes. These incentives are unavailable to renters.
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5. Pros of Buying a Home
When you own your own home, you do not have to consult a landlord for permission to make changes. You can have a pet if you want to. You can have guests or even rent out your own home within the limits of local laws.
Housing is also a more stable option. If you have a Fixed-rate mortgages, your monthly payment won’t change—you could keep paying the same monthly rate for 30 years, regardless of inflation.
Additionally, every payment you make to the lender goes partly to paying of the principal of the loan. Early on, most of your payment will cover the interest, but as you continue to pay off your mortgage you’ll pay more and more toward the principal. And with every bit the principal is paid down, you’ll have more equity in your home.
Why is equity a big deal? Because it is an asset. When you sell the home, the proceeds will belong to you after your mortgage and other costs are paid off in full. And since homes have historically risen in value over time, the home can be your most valuable investment.
Another perk to home ownership is that the government incentivizes citizens to buy. For example, mortgage interest has been a major tax deduction for homeowners for many years.
Because homeownership is valued in society, there are also government programs to protect homeowners from foreclosure. A single missed payment won’t leave you out on the street; you’ll have opportunities to work with your lender and laws to protect you from being kicked out of your home.
Other benefits to home ownership are less tangible. They include a connection to your community and a sense of permanence.
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6. Cons of Buying a House
Buying a house costs significantly more money in the short term than renting, thanks to the down payment and closing costs. If you take out a mortgage, you will end up paying far more than the selling price of the home over the life of the loan, thanks to interest.
While you’ll have more privileges as an owner, you’ll also have more responsibilities. It will be up to you to pay property taxes and homeowner’s association fees. You’ll be responsible for home repairs and maintenance, and if you have a yard and driveway there will be more work to do outdoors.
While home purchases have historically had an excellent rate of return on investment, there is no guarantee that your home will increase in value over time. Especially if the economy is shaky and you haven’t been in the home long, there is a chance you will have to sell the home for less than you paid. The value of homes changes over time.
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Which is Better?
In the end, renting or buying is up to you. Factors such as how long you want to stay, whether you are willing to make a long-term investment, and whether you are financially stable should all figure into your decision.
In general, buying a house is better if you want to stay put for at least a few years, and if you are financially prepared for the increased short-term costs as well as future expenses—both locked-in payments and unpredictable future expenses.
Renting is better for those who need flexibility and aren’t financially ready for a big purchase. If you expect to move again within a few years or aren’t sure about permanently rooting yourself in one area, renting is for you.
If you must move, you should factor in moving costs if you can’t move everything yourself. Apartment moving companies usually charge between $25-$50 per hour per mover. Full-service moving can be $2,300 or more. Cross country moving can be $2,200 to $5,700. Keep your budget in mind.
Has this article helped you evaluate the Pros and Cons of buying and renting? If so, please share it on social media so others can benefit, too. Thanks in advance!
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