FIRE Finance: Renting Versus Owning Costs

Edit Post Monday, November 26, 2012

Nov 27, 2012: The big debate these days is whether home ownership is still everything it's cracked up to be. Yes, we still get a tax deduction on the amount of interest we pay, but the building of equity is no longer a given with a home mortgage.

There are many areas around the United States with falling home prices, causing some people to be upside-down on their loans and leaving them unable to sell. On top of that, when we buy a home, we are responsible for the maintenance of our property, both interior and exterior. Many people think that once they buy a home, they will automatically build wealth, however, there are times when renting is better. Anytime we take out a loan, we also have to factor in the costs of carrying that debt even before we start to dream about fat returns in the future. This applies to any type of loan whether it is a home mortgage loan, a business loan, or even payday loans.

Costs of Carrying Home Mortgage Debt

The home ownership example is a good way to figure out the types of costs that can creep into finances that impact our lifestyle immediately. Everyone has heard of the adjustable rate home mortgage loans with creeping interest rates. This is one way that carrying a loan for a long period of time can cost us more every year. So, the terms of the loan are very important to understand before we sign.

Another way that homeownership costs can sneak up behind us is in the "invisible costs" that we have to pay to maintain our investment. We will either have to spend extra time caring for the property or pay someone else to do the lawn care and outside maintenance. This can include gutters, the roof, and even crawl space maintenance. Inside, any leak or appliance breakdown can spell financial trouble, if we don't add in several hundred dollars of extra monies for home repairs on top of the monthly mortgage to our budget. The same is not true if we rent and do not carry home mortgage debt.

Assess Our Situation

For some people, it just makes more sense to rent. Renting is good if we don’t plan on being in the area long enough for prices to appreciate to cover our closing and maintenance costs. Or, if real estate prices are depressed in our area and are continuing to fall. Buying too high will only cause distress for a homeowner. Elderly and single parents often choose rentals and town homes because of the lack of maintenance and some property oversight by someone who has more time or mobility.

In this day and age, we feel that owning is not always the answer. It definitely makes sense to take a detailed look at the real costs of ownership, in both time and money, before we sign on the dotted line. We look forward towards your views on renting versus owning.

Image Source(s): iStockPhoto

Anonymous said...

In the UK people seem to feel that getting on the housing ladder is a great investment. They seem no to consider that it might be a good investment for their children, but they will never see any of the money as they will always need the money tied up in a house if they want somewhere to live. People also consider renting to be throwing money away - however, if you consider how much interest you pay on a mortgage and maintaining the house, I wonder whether you really do throw any money on renting at all.

FIRE Finance said...

@Rachel
Thanks for your views Rachel. We acquiesce with you. If we invest the money we pay as interest on our mortgage we'll be well off in 15 or 30 years (the mortgage pay off time). Moreover renting is cheaper than owning since we don't have to do any maintenance and pay property taxes. People often forget that they pay nearly the same amount as the principal in interest when they take out a 30 year home mortgage. And the best part of renting is that it gives us the mobility to change cities and jobs at ease without having the headache of selling our houses.

It's a great reminder that one size doesn't fit all. In many parts of the U.S. it is cheaper to rent than own. You need to then evaluate how much you can make your money grow with the difference you would pay for a mortgage.

@Suzanne
You're right :). If we invest the difference properly for the time we'd pay off our mortgage, we've a feeling we'd come out stronger wrt networth. Plus we've the mobility of not being stuck to a place.

With tax rates in the U.S. expected to increase (even for retirees), it becomes more important for retirees to own assets that can provide tax free services (e.g., shelter services) without having to use income to pay for them. This means that a house with no mortgage moves near the top of the list of financial goals.

As a chronically low-income person, I value homeownership for its defensive properties - defense against incessant rent increases, defense against displacement and homelessness, defense against unaffordable housing costs in old age.

Also, I am very scared of regressive tax proposals which would explicitly tax rent while retaining the preferential tax treatment of homeownership.

This debate is more important *now* than ever before. On one hand credits are tight, economic outlook gloomy, job market precarious but at the same time excellent deals on houses are flooding the real estate horizon. To buy or not to buy? Not sure yet. In general I feel it makes sense to buy now. But it really depends on an individual's specific financial situation.

SailboatFamily said...

Thanks for this blog post ... it matches what we concluded. Based on our numbers (over the past few years), we reduced our outward spend by a whopping $9,000 when we sold our home and moved into an apartment.

@Mr.GoTo: Your note about strategies for older citizens is right on. Unfortunately, unless a municipality has an age exemption, homeowners will have to pay property taxes; the taxes can be quite substantial and they also grow without bound (like rent).

Elsie J. said...

I have done both - been a renter and a home owner. Now there is absolutely no doubt in my mind...renting is the smarter choice.

Why is renting financially rewarding? The cost of home repairs is something that most people do not fator into the cost of home ownership. A new roof? $10,000. A new furnace? $4,000. And every year it seems like something needs to be replaced.

The cost of replacing and repairing home appliances is usually not factored in with all the other costs, such as mortage, insurance and taxes.

Renting Versus Owning Costs

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