There comes a time in everyone’s life when the prospect of buying a house comes up. After all, it’s the American Dream! Whether it’s by relatives that (probably) have the best of intentions at heart, or friends that insist that it is the next step in your amazing adulting experience, at some point you’ll wonder if it’s right for you.
I get it: buying a house is not just a financial decision. It’s safety. It’s security. It’s psychological. Symbolically it has come to represent the full transition into adulthood. But I also want you to know that for financial safety and security, you do not need a house. If it’s part of your money story, great—but remember that it’s a choice and not a requirement.
If you’ve been considering all aspects of home buying but still have some things on your mind to weigh: I’ve got you covered! All that psychological stuff aside, here are some strictly financial pros/cons to buying as you consider your options:
- Money will come back to you later. Your mortgage payment includes a small amount of principal repayment, so some of that money will come back to you when you sell. When I say some, though, I mean some: don’t expect to get rich selling your house. If you rent, the money you pay every month doesn’t come back.
- No big surprises. Your mortgage payment will not go up much (the real estate tax and insurance parts of your mortgage tend to rise, but the principal and interest parts of the payment are fixed, provided you have a fixed loan). Renters are at the mercy of their landlords and the local real estate market. Renters can and often do get priced out of neighborhoods.
- Tax savings! The interest you pay on a first mortgage is deductible up to $1 million. Yep, ONE MILLION DOLLARS! Renters usually don’t get tax love.
- If anything goes wrong with the house, you pay. If you’re renting, you’re usually off the hook (unless you actually caused the damage, of course).
- You’re tying up down payment $$ (ex: $50k on a $250k house). That money could be put to work in a ton of other ways (namely investments), ideally making you more money than the amount you would have used as your down payment. When you rent, you don’t have to tie up that money other than a security deposit.
- The home can lose value. At the start of 2013, homes in Las Vegas were on average worth only 75% of what they’d been worth in 1987 (yikes!), adjusted for inflation. A 10-city US index showed that over the last 25+ years, US real estate increased in real terms by less than 1% per year. There is no guarantee your home will increase in value. Many don’t. When you rent, you don’t have to worry about this.
Then there’s the personal stuff: do you love your job and want to stay there for a long time, or are you looking for more flexibility for whatever opportunities might come your way? Because if you do buy a house, it’s going to take years to recoup the closing costs and break even…not to mention it’s much harder to sell a house should you need to move suddenly than it is to break a lease.
This list is yours to mull over, and the questions are yours to answer. But just remember that, contrary to what most financial experts will tell you, buying isn’t for everyone. In the end it comes down to your money story and your goals in terms of finance, family, and fun. And if playing house doesn’t fit into those goals, that’s okay: renting house can be just fine.