Deciding Whether to Rent or Buy

Making the decision to rent or buy a house is a huge one. It is a very personal decision based on several complicated factors. There are pros and cons either way and which is best for you depends on your individual circumstances.

Becoming a homeowner takes time, energy and money – but it's worth the effort. Ask yourself these questions:

1. Do I have a steady, reliable source of income?
2. Have I been employed regularly for the last 2 years?
3. Do I pay my bills on time?
4. Is my total debt (all credit cards, car loans, etc.) manageable? Can I afford those debts and a mortgage?
5. Do I have some money saved for a down payment?
6. Do I have some money saved for closing costs?
7. Can I afford both the mortgage and other expenses, such as electric, water, repair and maintenance costs?
8. Do I have time to take care of a house – including responsibilities like mowing the lawn and repairing my property each spring?
9. Do I have time to devote to buying a home right now? Or are other commitments, like night school, a priority?

It might seem obvious, but the most important factor to consider is how long you intend to stay in your new home. Consider your lifestyle. Are you a pick-up-and-go kind of person or a settle-in-and-stay-a-while kind? For many people, owning a home involves them in the welfare of their community. You may feel a greater sense of belonging and permanence by owning your own home.

Renting a house has the obvious advantage of being easier to depart from. There is usually only one month or the duration of a lease to complete and you can be well on your way. A house of your own can take much longer to sell leaving you stranded where you are unless you decide to rent your home and move on.

There are two ways to look at this decision. First, the Big Picture - is there a possibility that you might get transferred or develop a sudden desire for a different environment, province or even country? If you answered yes, chances are buying a home isn't right for you. Renting is a short-term plan. You sign a lease that begins and ends, with an option to renew at a possible rent increase. Renting means you can move to Oakville, British Columbia, or Mexico on short notice.

If you’re reading this, it’s more likely that you've pictured yourself living in one place for the next 5, 10, 15, 25 years and like what you’ve seen. But do you want to live in this area for all of those years? You need to consider the future of your neighborhood and your relationship with your neighborhood. Is it "on the way up," real estate-wise? Does it have everything you want? Do you like the people? The stores? The dry cleaners? The grocery stores? You don't need to answer yes to all of these questions, you just need to determine what you prioritize and whether or not your new neighborhood has what you want.

Buying a home is a long-term plan. It's like marriage. If you shudder at the word "commitment," you might want to think twice. Buying a home means taking ownership of, sinking money into, and making a commitment to one home. Buying a home also means that you can count on living in a place at a fixed price, save the occasional fluctuations in taxes and maintenance costs.

The obvious drawback of renting a home is that the money you pay for rent each month goes to the owner and leaves you with nothing gained other than a place to live. The owner of the property has the benefit of the investment, which is earning more value every year, while you merely pay money and gain no extra potential earnings.

The most obvious benefit is home ownership is building equity. In the early years of most mortgages, the majority of your monthly mortgage payments go towards interest on your loan. Over time, an increasing amount of the monthly payment goes toward reducing mortgage balance, or principal. As you make payments, you reduce the principal and increase your share, or equity, in your home's value. If your home increases in value through appreciation, your equity will build even faster. Building equity — or savings — in your home is important. For many people, it lets them plan for retirement and other future goals.

However, though there is an advantage in the investment part of home ownership there is the disadvantage of needing to have the funds available to make sometimes very costly repairs and maintenance. So that investment is coming with a price tag all its own.

Say you rent a home for $1,500/mo. In return for your $18,000 annual investment (after-tax of course, implying a pre-tax cost of $25,000-$30,000 or more), you get a place to live and not much else.

Conversely, you may find a place for about $160,000. You have to put down 20% so and your mortgage is about $128,000. On a 30-year mortgage at 7%, this is a monthly payment of about $860. Add a monthly expenses (such as taxes and maintenance) of $640 and you are spending the same $1,500/mo.

So, what's the difference? Most obviously, you have to come up with $32,000 in cash as a down payment (plus related mortgage and closing costs). However, you're probably getting to live in a nicer, bigger place for the same monthly payment. Plus, owning property awards substantial tax benefits, since a large percentage of monthly maintenance is tax-deductible, along with the interest on the mortgage.

If your family is expanding, then purchasing a house now for your current needs and income may be pointless if you will need to move in a few short years. Once children play into the picture the previous carefree days of moving are gone. Though still a thrill for some people, it is usually a real pain for the children, especially if relocating takes them far from familiarity and friends.

Finding a rental may be quicker in some cases if you don't have a lot of requirements like pets or location. Some rentals can be available the day you are looking while buying a house usually takes at least thirty days to move into.

However you make your decision, you are ultimately considering finances, family size, available funds and desired stability. With those in mind you can choose which option is best for you.