Ready to quit renting? Weigh the financial pros & cons of homeownership first
Making the leap from renting to homeownership is a big financial responsibility. Before you make an offer on a house, be sure you understand the full financial pros and cons of doing so.
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Owning a house is a larger financial responsibility than renting an apartment. It can have advantages and disadvantages.
A house may sound glamorous from the perspective of apartment living. One of the biggest financial myths is that renting is “throwing away money” because you're not growing a financial stake in your home. The fact is, renting an apartment is a good way to live somewhere without having the financial responsibility of home ownership.
Consider analyzing these five financial pros and cons of renting vs. homeownership before making an offer on a house.
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New homeowners can get direct financial assistance from the federal government, states and other agencies. First-time homebuyer programs can ease the mortgage process, help you get a loan or pay for closing costs.
First-time homebuyer programs aren’t one-size-fits-all. They vary based on your location and eligibility requirements. Some programs help less qualified borrowers get approved for a mortgage, while others pay for some down payment or closing costs.
To find some of the programs that could be available to you, check out our guide to first-time homebuyer programs.
When you buy a home, you’ll start contributing toward your home equity. Equity is the value of your financial stake in your home — essentially, the amount of your home’s value that belongs to you, not the bank. Your down payment and a portion of your monthly mortgage payment (minus taxes, interest and other fees) will go toward the principal of your loan.
Over time, paying money toward your principal helps you build up equity. You can use your home equity as another form of credit and borrow against it in the form of a home equity loan or a home equity line of credit (HELOC). Here’s a deeper look at the difference between a home equity loan and HELOC.
One of the biggest perks of homeownership is keeping the profits if you sell your house. The more equity you have, the more money you stand to make.
There are many tax advantages of homeownership that you simply won’t get when you rent. For example, you can write off any fees you paid directly to the lender to reduce your interest rate (commonly known as mortgage points). The available tax deductions are a big deciding factor when purchasing a home, said Mark Washburn, real estate agent for Naples Condo Boutique.
“One of the most favorable advantages to owning a home, in addition to building up equity, is the deduction for the interest and property tax portion of your mortgage,” he said.
Here are the tax deductions you can take as a homeowner:
Mortgage interest deduction: You can deduct all mortgage interest on the first $750,000 paid toward your home for all houses purchased after Dec. 15, 2017.
Home office deduction: If you’re self-employed and work from a home office as your primary place of business, you can deduct a portion of your mortgage and utility bills.
Capital gains tax exclusion: When you sell your house, you can exclude $250,000 (up to $500,000 for joint filers) of the sale from capital gains tax.
Homeowners insurance: If you work from a home office, rent your house out or your house sustains a loss or damage that isn’t covered by your homeowners insurance, you may be eligible for a tax deduction on your homeowners insurance premiums.
Property tax deduction: The state and local tax deduction lets you deduct state and local property taxes from your federal income.
Home improvements: Certain home improvements are tax deductible, like improvements that count as medical expenses (ramps, handrails and more) and energy tax credits for installing solar panels.
Mortgage credit certificate: Qualifying first-time homebuyers can apply for a mortgage credit certificate with their state, allowing them to get a federal tax credit up to $2,000 for the mortgage interest they pay. These credits are available in certain states to low and middle-income first time homebuyers, or to buyers in targeted neighborhoods.
Assuming you make your payments on time, having a mortgage can increase your credit score by demonstrating your dependability and credit-worthiness. “A better credit score in turn can reduce the interest rates on business loans or the cost of your car insurance, providing other financial benefits over time,” said Washburn.
Lenders generally report mortgage payment history to the credit bureaus. As long as you make payments on time and in full, you’ll continue to build a credit history that can help your credit score, saving you money in the long run.
On-time rent payments can appear on your credit report, but your landlord has to report them to the credit bureaus (or you'll have to report them yourself through a third-party payment platform for a fee). Even then there are many different credit scoring models that lenders can use to calculate your credit score, and not all of them take rent into account.
When you own a house you cab rent your home, or part of it, to a tenant. Depending on the economics, this could be a way to help you cover your mortgage payment or earn extra money. Renting to a tenant could also help you get through hardship if you lose your job or undergo a financial crisis.
But renting out your home, or part of it, isn’t a guaranteed financial home run. You’ll be responsible for keeping your property safe, clean and healthy for your tenants. You’ll also need to make sure you’re adhering to federal, local and state laws that set standards for rental properties and landlord-tenant relationship — ranging from local building codes to the Fair Housing Act.
Make sure you check your homeowners policy before renting out your house. You may need to get a new policy to cover your home and property for short-term rentals, or even sign up for landlord insurance to protect your home from damage and accidents.
Despite the value of home equity, homeownership isn’t always the strong investment it’s perceived to be. That’s because there are a lot of additional costs when you buy a house that offset the perceived value.
There are many reasons you might pay more for utilities when you buy a house. If you split bills or rent with roommates then buy a house on your own, you will no longer be able to share your expenses. If your utility bills were previously included with your rent you’ll have to sign up and pay for them yourself, including water, heat or cable. The larger the home you purchase, the more you’ll have to pay to heat it in the winter and cool it in the summer.
Make sure you have an idea of how your monthly expenses will change when you move into a home, factoring in your estimated mortgage payment and your monthly bills. For some bills you will need to use your best guess, while others can be estimated using some legwork. For example, you can call the power company and get an average monthly bill for your new address. You’ll also need to get your own internet connection and any streaming services you previously shared.
When you rent an apartment, the landlord is responsible for maintaining the property. When you own a house, all the responsibilities fall to you — from cleaning out gutters and changing out HVAC filters, to replacing busted appliances and fixing your roof.
If your house has a yard, it will cost money to maintain. The more space you have and the higher the quality of landscaping you want, the more it will cost to keep up. Paying landscapers can cost a pretty penny, but even doing it yourself will require you to spend money on equipment like lawnmowers and supplies like dirt, grass seed and mulch.
“Even if you were smart enough to pass on a ‘money pit,’ there are still repairs or replacements you’ve never dreamed of,” said Washburn. For example, appliances, plumbing, chimney and fireplace issues and patching or painting walls. You’ll also have to consider larger repairs like roof replacement, resealing a driveway or buying a new furnace, he added.
Property taxes are the annual taxes you pay on your house, property and land. Local governments like states, cities and counties impose property taxes to pay for services like schools, police, fire departments, road maintenance and trash collection.
Property taxes vary across jurisdictions and will depend on the assessed value of your home. Taxes may be collected quarterly, semi-annually or annually. In some cases you will pay your taxes directly to the jurisdiction, while in others you pay into an escrow account. An escrow account is a bank account that your lender holds and maintains for you. It houses your mortgage payments and is used by your lender to pay property taxes on your behalf.
Be aware that property taxes change over time based on your area’s tax rate, your home’s value and other factors.
Here’s a more in-depth explanation of how property taxes work.
When you rent an apartment, all you need is renters insurance to cover damage or loss to your property inside of the home. But when you purchase a house, there are many other types of insurance you may need:
Homeowners insurance: This type of policy is usually required by the lender when you take out a mortgage. It protects you if something happens to your home, belongings or other structures on the property. Homeowners insurance is generally more expensive than renters insurance because it covers the property itself, not just your possessions.
Flood insurance: If you live in a high-risk flood area, your lender may require you to get flood insurance. Even if you don’t, you may want to get it as it’s relatively cheap when you don’t live in a high-risk area.
Private mortgage insurance: Private mortgage insurance is usually required by lenders if you can’t provide a 20% down payment when you buy your home. This policy protects the lender, not you, if you default on your mortgage — but you are responsible for paying it and it can add hundreds to your monthly payment. PMI can be canceled once you’ve paid down enough of the principal on the loan.
If you buy a house or condo in a community with a homeowners association, your house might come with perks like community pools, playgrounds, parks as well as maintenance of common areas. But you’ll pay for the privilege — anything from a few hundred bucks a month or a year, depending on the level of HOA benefits provided to the community.
Your fees could also include contributions to HOA insurance, which covers your building and any common areas. Before taking out a personal condo insurance policy, take a look at the benefits included in your HOA policy (if your dues include it).
Making the leap from renting to owning is a big financial responsibility. Homeowners have a financial stake and control over their home, but can pay higher bills, property taxes and community fees. Renters aren’t responsible for extra costs like home repairs and maintenance, but don’t have any financial skin in the game with their home. Before you jump into homeownership, make sure you understand the full financial pros and cons of doing so.
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