- \ Gerard Gruber
- September 17, 2020
!Rent or Buy Certified Financial Planner CT advice
The financial pros and cons of each option.
Even though we have experienced more than a bit of fluctuation in the markets this year, one silver lining is that the 30-year interest rate on home loans has fallen well below the average of the past few years. On July 16th, 2020 the interest rate on a 30-year home loan fell to 2.98%, and the 15-yr to 2.48%. [i] Two years ago, those rates hovered around 4.5% and 4% respectively. [ii]
With interest rates this low, many individuals have been taking advantage of this opportunity to refinance their homes while others are wondering if now is the time to finally “go all in” and buy a home or piece of real estate themselves. Even though real estate is considered an investment and can offer some tax deductions, buying over renting isn’t always the best financial decision overall. Let’s take a look at it from a financial standpoint.
Ownership
There are many emotional reasons people put down the money to buy a home—to feel like they have a place they can call their own, to take pride in ownership, to customize their home the way they like it, and eventually pay off and pass it onto their heirs. Financially, it can serve as an investment vehicle that offers tax deductions and a way to build up equity.
In reality, your principle and interest account for only about half of your monthly homeownership fees. So let’s take a look at the other expenses that come with homeownership:
- Homeowners Insurance: Not only do you have to cover homeowners insurance to cover the equity in your home, you must also carry mortgage insurance if you make less than a 20% down payment.
- Maintenance: How old is you’re A/C unit? Do you know how long it will last before it needs to be replaced? Is your roof up to your insurance company’s current code? These are major expenses that could put a damper on your monthly budget, but even smaller maintenance costs like air filters, sprinkler system repairs, or a leaky faucet can add up quickly.
- Taxes: As the homeowner, you are responsible for covering the taxes assessed on your home each year. If you were renting, this expense would not fall in your lap.
- Realtor Fees: The more often you move, the more you will pay in realtor fees. Most people these days don’t stay in the same home for thirty years, or the length of their mortgage, so each move costs about 3% of the buying and selling price of each home.
- Trash pickup, water, and sewer services
- Flood insurance, where necessary
- Pest control
- Lawn maintenance
Buying a Home With Cash
Now, if you have the funds to buy your home outright without acquiring a mortgage, the story could drastically change. Sure, you will still be responsible for covering taxes, insurance, maintenance, and realtor fees, but your monthly out of pocket will likely be significantly less since you won’t be paying any interest. In this case, owning your home becomes more of an asset than a debt.
Keep in mind, though, when and where you buy your home can have a huge impact on its value, as well. Perhaps the new neighborhood you bought into didn’t sell out as planned and the county decides to zone a landfill half a mile down the road, negatively impacting your home’s market value. Or if you buy at the height of market, but find yourself in a position to sell after a market fall out, you could end up upside down on your investment. There are a number of extant factors that can hurt or help your investment in a home.
Renting
So contrary to popular belief, buying a home doesn’t make you rich, just like renting doesn’t make you poor. Neither choice is inherently better than another. Renting doesn’t actually mean you are “throwing” away money each month, either. You have to have a place to live, which will cost you money no matter how you look at it.
Renting also allows added flexibility and predictability—flexibility to move more frequently and on short notice and peace of mind that someone else is responsible for major homeowner repairs. Of course, which maintenance responsibilities will fall on you, and which will fall on your landlord, will be outlined in your lease; but, you can expect that should your A/C break, you won’t be digging into your own emergency fund to fix it.
Because your landlord is responsible for covering taxes, insurance, and maintenance expenses, you can expect that your rent will be higher than if you were carrying your own mortgage on the home; however, you are paying a higher monthly rent to avoid being responsible for the other expenses.
Where you live is a major decision. It can determine where your kids go to school, the types of amenities you have access to nearby, and how long it may take you to commute to work. But, financially, the decision of whether to rent or buy a home can be a bit more complicated.
Still unsure if renting or owning should be your next step?
The financial advisors at Harbor West can help. We will look at your options with you to see if renting or buying makes the most sense in the scope of your overall financial plan. We may find that owning is a great option for you and your family, but maybe not for a few years down the road. Or perhaps we can help you scale back the costs of owning or renting a home while you accelerate your savings rate in other areas.
Contact us today to schedule a complimentary Discovery Call to see if the wealth managers at Harbor West could be the right fit for you.
All guarantees, riders and benefits of an insurance policy are subject to the claims paying ability of the issuing insurance company.
[i] FreddieMac.com, July 16, 2020
[ii] OCRegister.com, July 16, 2020 , Realtor.com, July 13, 2020,