There are advantages and disadvantages to both renting and buying the home you live in; the choice depends on your personal situation and goals.
Financially, purchasing a home is a better long-term decision then renting and in the right market conditions, can even payoff in the short-term. Owning a home has proven to be one of the best ways to build wealth over time. Today, rates are still at historical lows and appreciation is very strong. So, are there any general principles that make buying or renting a better decision?
Advantages of buying a home
When it comes to buying vs. renting, the most common comparison is equity. While renting, you do not accumulate equity whereas homeowners build equity in multiple ways: principle reduction, sweat equity and appreciation.
- Principle reduction: Your mortgage payment is comprised of four parts: Principle, Interest, Taxes and Insurance (PITI). The principle portion of your mortgage is reducing the loan balance with each payment, which can be recouped if you sell your home.
- Sweat Equity: Home improvements increase the value of your property, which is also called sweat equity. According to HGTV when comparing different home improvements, a new front door has the highest return on investment at 102%. Most improvements like kitchen or bathroom remodels return about 60-80% of your investment.
- Appreciation: The Seattle market is one of the top areas in the country for home value appreciation. A $200,000 home appreciating at just 5.4% is worth $338,404 in 10 years. Appreciation helps build wealth and…