Rent to Own in Arizona
Renting VS. Buying a House: Which Is Right for You?
Building the “American Dream”
Owning a home often gets included in the idyllic picture of “The American Dream.” Although this image has changed over time, many Americans still view homeownership as a pinnacle of success and security. In fact, for most Americans, the equity, or value above their mortgage balance, is the single biggest asset they own.
Frederick Peters, CEO and contributor at Forbes, shares that homeownership is part of the American dream because:
- Owning a home contributes to a sense of belonging
- Home ownership connects people to a community
- Having one’s own place encourages marital stability
- Ownership dreams date back to the country’s earliest foundations
- Home ownership allows you to grow your wealth while living where you love
Although ownership makes up a vast share of the market, many experts have proposed a new version of the American dream. This version emphasizes renting as a viable option. It is especially important for millennials and younger generations.
Following the 2008 housing crisis, rental numbers in the United States are continuing to increase at a steady rate. These statistics support the notion that having access to stable and safe housing options is more important in a modernized version of the “American Dream.”
Understanding the Housing Market
No matter which version of the dream you subscribe to, making a housing decision should be based on facts. A good starting point is to fine-tune your understanding of the current housing market.
Housing trends can reveal important factors that may influence your decision, such as:
- The rising prices of homes in a selected area
- Increasing mortgage interest rates that could affect a future loan
- Ongoing homeownership costs such as upkeep or repairs
- The flexibility of being able to move without having to first sell a home
Since the rates of home rentals are higher than they’ve been since 1965, the availability of homes could play a role in your search. While you should get an idea of what’s for sale in your city or town, it’s also wise to consult a real estate professional who can paint the bigger picture.
Understanding Your Personal Financial Situation
Not only does renting versus buying a house depend on the market at large, it also depends on your personal financial standing and money goals. No matter which option you’re leaning toward, it’s important that you begin to get your finances in order as soon as possible. It can take several months or years to improve credit or save cash, so it’s never too early to start.
Be prepared to evaluate 3 key areas of your personal finances as you prepare for the home-buying process. These include:
- Proof of income and employment. Whether you buy or rent, banks and landlords are both interested in recurring paychecks. If you opt to purchase a house, you’ll need at least 2 years worth of tax returns showing consistent employment.
- Cash savings. Looking to close on a dream house? That may require a considerable down payment. Lending institutions typically require 20% cash down on the loan. That number may shift with factors like Private Mortgage Insurance (PMI) and other financial incentives based on income.
- Credit report. Your credit score has a direct impact on your interest rate, and poor credit results in much higher rates. Take steps now to improve and monitor your credit.
If you look closely at the market and your own situation and decide that renting is best, that’s perfectly acceptable. Renting is extremely beneficial for short-term stays and when the cost of maintenance outweighs equity.
Financial Costs to Renting vs. Buying a House
It should come as no surprise that there are costs associated with both renting and buying. The lists below provide a snapshot of expenses you can expect in both scenarios.
- Unexpected rent increases, which can occur unpredictably or at high percentages
- Repairs for damages that are not considered normal “wear and tear”
- Deposits that might not get refunded
- Leasing, or moving fees if you are forced to relocate due to non lease renewal
- Increased tax liability from not owning a home
- Rental taxes
- Mortgage interest (often the highest portion of your payment early in the loan)
- Property taxes and homeowners insurance
- Repairs, renovations, and continued maintenance
- Pest-control, garbage pickup, and home security
- Community, neighborhood, or home association fees
Could a Rent-to-Own Situation Help?
Perhaps neither renting or owning sounds like the perfect fit to you. Is it possible to mix these two worlds together? The answer may be found in the rent-to-own process.
There are a variety of rent-to-own programs that allow potential buyers to build credit and security while living in a designated rental for a given time. Many different rent-to-own programs are available. Each option comes with different requirements, fees, and legal considerations.
Discover which rent-to-own program is right for you!
Risks of Renting vs. Buying
While every decision in life comes with risks, you should focus less on the negatives and more on preparation. Taking a realistic look at the downsides of renting versus buying a home can help you understand which risks you’re more willing to take. Additionally, this may change as your finances, location, and employment change over time.
- Unexpected housing changes – Although unusual, there’s always a risk that a property manager could change your housing situation on short notice. Leases protect against this, so it’s important to sign an official one.
- Being stuck in a lease – On the flip side, what happens if you want to change residences? As a tenant, breaking a lease carries steep fines. If you anticipate moving before your rental period is over, sign your lease accordingly.
- Missing tax and financial benefits – Renting doesn’t afford tax advantages and doesn’t help you build equity. While not as important for everyone, if you have a high income or need to reap tax rewards, renting may not be suitable long-term.
- Paying rent but not building equity.
- Responsibility and liability – When you own, some of your biggest responsibilities may not be immediately evident. Hidden costs could appear when you’re not prepared, especially if you own an older home with outdated electricity, plumbing, or HVAC.
- Potential depreciation – Most homebuyers are hopeful for increasing property values, but are you ready to weather a changing market that could devalue your home? This is an important risk that all homebuyers should keep in mind.
- Less flexibility – Job changes, relocating, caring for family members. These important life events can happen unexpectedly. Owning means that you have less ability to move when required, and your plans might depend on the sale of your home.
Benefits of Renting vs. Buying
Both renting and buying property have their upsides. And in certain seasons of life, you may find that the benefits of one option appeal to you more than the alternative. Here’s a breakdown of the benefits.
Benefits of Renting a Home
Based on the statistics alone, many individuals and families are jumping on the rental bandwagon. Barriers to homeownership often include having to pay down high student loans and working in cities with high costs of living. If these factors push you to rent, there are several upsides.
- No large cash payment upfront – Down payments and savings matter more when closing on a home. Renting provides flexibility when you don’t have large cash sums.
- Location flexibility – In particular, younger generations are looking for work and housing options that allow them to stay mobile. Renting provides the ability to stay in one place for a shorter time, without risking more debt.
- Maintenance is provided – Keeping up with ongoing home maintenance can be difficult and costly. Typically, it’s a landlord’s responsibility to maintain a rental property. This can include everything from pest control, to HVAC servicing, to fixing a leaky sink.
Benefits of Buying a Home
If you’ve carefully considered the pros and cons of buying a house versus renting, and feel strongly that ownership is the next step, congratulations! There are several perks to owning your own home that go beyond a sentimental feeling when you pull in the driveway.
According to the housing marketplace, Zillow, owning a home helps you achieve:
- Important tax benefits – Ready for deductions? Homeowners are eligible for many helpful mortgage interest deductions that can provide a big boost at tax time.
- Savings and equity – Although mortgage payments are one of the biggest line items on a budget, they don’t go to waste. Each payment helps pay off a loan’s interest and principal amount. Continual payments build personal equity in large chunks over time.
- Appreciation – Many people underestimate the true appreciation value of their home, which can often be more substantial than stock investments. Although the exact percentages vary greatly, this is a huge selling point for building assets with property.
Beyond these big picture gains, there’s also the simple fact that owning a home makes it completely yours. Of course, this provides freedom if you’re looking to renovate or customize according to the needs of your family.
Still Trying to Decide? Consider These Helpful Tools
This resource is valuable for anyone who is looking to compare renting versus owning a home. Although there’s no one-size-fits-all solution, your housing options will likely change throughout your life. Having a basic understanding of the big picture will be helpful in years to come.
Are you curious about how much home you can qualify for? Century 21 Northwest Realty offers a handy Home Affordability Calculator that can paint a realistic picture of your housing situation in order to set or reshape your real estate goals. Additionally, the First Time Home Buyers Guide is a resource you won’t want to miss if the housing process has ever left you feeling confused or lost.
Still on the fence about renting versus buying a house? We hear you. Add your personal numbers to this popular Rent vs. Buy Calculator. Then, reach out to the Century 21 team when you’re ready for one-on-one, professional advice.