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 provides longer-term security.
Using leverage to buy a home is one of the greatest financial advantages of owning real estate. As real estate appreciates, you gain not only on the amount you invested (down payment) but on the entire value of your home.
Example: If you put 5% down ($15,000) on a $300,000 home and it appreciates 5% in the first year, your equity doubles to $30,000.
Disclaimer – The cost of selling real estate is much greater than the cost of selling stocks which is why no financial planner advises real estate as a short-term investment.
Having a home, not just a place of residence:
Owning a home is not just about the financial decision but also about the lifestyle and freedom of owning a place of your own. An apartment or rental can be a home too, but saving your money so you can build that dream deck or plant the perfect garden—for many, that is the big winner in the rent vs. buy decision.
Advantages of renting a home
When renting, you have the option to sign short-term leases. Apartments or rental homes offer a variety of rental terms – month-to-month, six-month or yearlong leases. If you are not ready to settle down, renting might be a better option for you.
There are responsibilities of homeownership such as maintaining a property, paying for repairs, paying property taxes and more. Renters do not have these same responsibilities.
The ultimate goal of homeownership is to pay off your mortgage and live without a monthly rent or mortgage payment. If you are ready to own a home, contact a Verity representative or visit veritycu.com/mortgage for more information.
Hi, I’m Kira. I joined Verity in early 2012 after a seven-year stint as a newspaper reporter. While I never thought my career path would veer off in this direction, I am loving my time at Verity. I recently moved from being a member services representative at the Alderwood Branch to being the marketing coordinator for the credit union.
I’m originally from Texas, but I have lived all over the country and the world, including Boston, Massachusetts, Anchorage, Alaska and Sydney, Australia. But in all my travels, the Pacific Northwest is the only place that has felt like home.
When not at work, I am usually home with playing with my son, husband, dog and three cats. During the rare times I don’t have a to-do list to plow through (and it’s not raining too hard), I can be found digging in the vegetable garden, training for a half-marathon, or grilling in the backyard.