Is buying a home always the smartest financial decision? While many people will opt to buy a home in an attempt to invest in their financial futures, there are actually instances when buying isn’t the best financial decision. In fact, sometimes renting an apartment or home is the cheaper option, so it’s important to go into the process with a full understanding of what is the right financial decision for you. Here’s what you need to know about the financial benefits of renting and the financial benefits of owning.
How Owning a Home Benefits You Financially
Owning a home has some benefits, and the biggest one is the benefit of building equity in the property. Building equity allows you to have something of value that you could use in the future should your financial situation change. In theory, property values have a tendency to increase, and so your home may end up being worth more than it was when you purchased it after several years of paying your mortgage.
Owning a home also brings some tax benefits. The homestead exemption in many states allows the property owner to have a lower property tax payment for the home in which the owner lives. For people who itemize, federal tax deductions allow for the deduction of property taxes and mortgage loan interest.
Personal Financial Benefits of Renting
Those are some pretty big benefits, but that doesn’t mean there aren’t benefits to renting. One of the biggest personal financial benefits is the fact that you won’t have to shoulder repair costs. If your pipe bursts or your air conditioner goes out, your landlord must shoulder the cost.
With renting, you aren’t hurt by changing economic conditions. Your home’s property value could drop, but it won’t have any effect on you. Again, this is your landlord’s problem.
In some instances, renting is actually cheaper. One way ot tell if your rent is cheaper than the cost of buying is to figure the price-to-rent ratio. This number is figured by dividing the sale price of a home for sale with the annual rent for a similar rental home. High ratios, which are near or above 20, mean that by the time you pay property taxes, insurance, maintenance costs, and other costs of homeownership, you’d be better off financially renting.
So what’s the bottom line? The bottom line is that it is really a case-by-case decision about whether renting or buying is the best choice. For some, renting is the wisest option, while others need the benefits of buying. No matter which you choose, you can be confident that you are doing the right thing for your personal finances if you take the time to look closely at the options you have.