Your home is more than just your haven—it represents a huge chunk of your living expenses. On average, Americans allot 26 percent of their monthly budgets on housing, whether they rent or own their homes.
After the housing market crash that began in 2008, many people became afraid of the housing market, opting instead to rent short term until the market stabilized or until they could get back on their own financial feet.
Though many years have passed since the bleakest days of the housing market, some of the anxiety remains. Cost-wise, is it smarter to rent a home or own one? The answer is more complex than most people realize and depends on a variety of factors. Here are some things to consider when you analyze your own living situation.
Compare ALL the Costs
Many prospective home buyers look at a projected mortgage and compare it to what they pay in rent to determine which makes more financial sense. This is only part of the comparison process though.
Renters should think about what initial costs they may have if they buy a home, like a lawnmower or a new fence. Renters should also consider maintenance costs. There are also property taxes, insurance, and any home owner association (HOA) fees to consider.
Buying a home has its own financial benefits though. The money that goes into the mortgage and any maintenance or upgrades can feasibly be made back eventually, whereas rental payments are never returned.
Know Your Own Intentions
Most future homeowners go into the process with the mindset that they will make all their mortgage payments on time, and then sell the home for a hefty profit when they retire or need the cash.
While that could certainly happen, you also need to consider the reason your home price will increase over time: the cost of living will too. It is never wise to make a home an entire nest egg, particularly since you have no way to predict the market trends around the time you will want to sell it.
The smartest move for people who view their home as an investment is to meet with a financial planner and set up some other funds to diversify their holdings.
Consider Your Age
In general, the younger you are the more beneficial renting is—particularly if you have not decided on a permanent location yet. A young person, for example, may pass up a lucrative job promotion if she owns a home rather than advance her career.
On the other hand, a young man in his 20s or early 30s who is already happy where he lives and works can avoid years of thrown-away rent money by making the decision to buy early on.
An older, more established person (in her 30s and up) may find more financial comfort in purchasing a home, and also more satisfaction in being able to take that step in life.
Decide How Long You Will Live There
This ties into the last point and is an important question for people of all ages. Perhaps you are not planning to move out of your area or change jobs within the next decade or so, but will your life change in other ways? Will you grow your family? Will an aging parent move in with you? Will you simply outgrow your space? If you are not sure where you will be in five years, or what your life might look like, renting may still be a smart option.
On the other hand, if you spend those five years renting a place that is not truly your own, and THEN decide to buy, those are investment dollars that are forever lost. No one can predict the future, but before you decide to buy or rent, you should do some educated forecasting and figure out which decision is the best fit.
Figure Out What Will Bring You the Most Peace
This is a factor that will be different for every person. For most, there is a lot of satisfaction that accompanies homeownership. It is a way to put down roots and a source of stability in an otherwise hectic life.
Every homeowner will have moments of house-related financial stress though, whether it is a maintenance issue that needs to be addressed or a rise in property taxes. Those who decide to own their home should be prepared to roll with it and flow through the challenges, remembering the valuable lessons learned and to reach out for help from friends, family, and trusted experts like The ARAMCO Group.
When it comes to homeownership, there is not one right or wrong answer or a formula that can be applied to every situation. Do some research on your own, and meet with a financial planner to discuss your future financial goals. From there, you can best determine if homeownership is right for you.