Are you in that stage of your life where your friends have started buying homes, and you
are wondering whether you should stop renting and buy a house instead as well?
Well, in this video, we will look into the pros and cons related to the decision to buying
a house versus renting it.
There will be many factors that affect this decision including financial as well as some
personal and emotional factors.
Renting a House Let's begin here; many people will say right
off the bat that renting is a waste of money.
Why would you want to give your money to your landlord each month for zero return when you
could be investing in homeownership?
Many financial experts will bring their sophisticated charts and financial models to their table
and show you clear reasons to not rent and instead own a property.
However, there are a few situations in which renting will be a better option:
One of the biggest is, you are paying off existing debt.
It may be the case that you have student loans or credit cards to pay off, so you want to
rent out a cheaper apartment in order to save and get out of debt first.
2.
Your job involves relocation every few years.
You might have selected a career path which involves a lot of international projects and
assignments and you might find yourself relocating after every couple of years in one place.
Rent will be the best option for you since you can easily switch and move to a different
location.
3.
Buying a house is a long-term commitment.
You might still be young, and you have not decided on which place you want to settle
in.
Therefore, renting is a good alternative as you will always have a choice of moving somewhere
else.
It will buy you time until you have a more solid plan in your life.
4.
No maintenance hassles.
Perhaps one of the biggest benefits of renting is that you do not have to worry about repair
and maintenance.
In fact, if there is a problem, you do not have to call a plumber or go to the nearest
appliance store; instead, you just simply call up your landlord.
Your landlord has to deal with the rest as per your tenant contract with him.
Maintenance is not only a costly activity sometimes but also a time-consuming activity.
Thus, many people will simply choose the option to rent for a greater peace of mind.
Renting will have certain disadvantages as well.
These include:
1.
Rents have the tendency to go up.
Inflation, competition, and rising property values will cause the rental prices to go
up each year.
This might negatively affect people who had chosen to live on a rental arrangement in
order to increase the savings.
2.
There are no financial incentives.
The homeowner will be able to enjoy several tax advantages and an increase in property
value.
The renter will not be able to benefit from any of these and will not see his money again.
3.
Less freedom to renovate.
You will have very little say in what your place will look like.
If you want to remodel your kitchen to something that is more modern, the landlord might not
approve of the idea, especially since he will be the one paying for it.
However, a homeowner will have greater flexibility in renovating or remodelling his own.
Buying a House
Now let's looking into this part.
Buying a house is a major life decision for many people and can be done in two ways.
Either you can pay a 100% using your equity or you can put a 20% down payment and pay
the rest as mortgage payments.
Mortgage loans can range somewhere between 10 to 25 years.
Therefore, before you make such a long-term commitment, it would be better to understand
in greater depth the various pros and cons of owning a house:
So, some of the advantages of homeownership are:
1.
Every payment builds up your equity position.
When you pay your rent the equity is gone, but when you pay your mortgage, you are increasing
your ownership proportion of the property.
Although mortgage payments will be more expensive as compared to rent on the property.
This is because it would include both debt and interest payments, but at least you are
working your way towards full ownership of the property.
2.
Capital appreciation.
Your home will increase in value over time depending on the market.
You might have bought if for a $300,000 but now it is worth $400,000.
The difference is referred to as capital appreciation or return on investment.
3.
Tax advantages.
Mortgage interest payments are tax-deductible and therefore, they will bring an individual's
overall tax bill down.
4.
Freedom to renovate.
As we mentioned earlier, you have the choice of remodelling or renovating your house as
per your desires.
In a rental property, the landlord might not allow any changes to be made within the property.
5.
The American Dream.
The goal of most people is to have a house to raise a family in without worrying about
being kicked out by the tenant or worrying about increased rental prices.
Most people will be satisfied knowing that they have made this dream a reality by owning
a house.
House ownership does come with its share of problems as well:
1.
Relocation is difficult.
This would be a big problem if you decide suddenly that you want to move somewhere else.
2.
More hidden costs.
There are a lot of explicit and hidden costs of owning a home.
Some of these include flood policy, HOA fees, property taxes, higher utility bills, higher
insurance, etc.
3.
Maintenance hassles.
You will have to deal with maintenance issues by yourself as there is no landlord to take
responsibility for the property.
How Much Mortgage can you Afford?
If you decide to go for ownership, then before applying for a mortgage, you need to think
about whether you can make the mortgage repayments.
Mortgage providers will look at your income and expenses to see if you will be able to
keep up with the payment when interest rates rise or your circumstance change.
When working out how much to lend you, the mortgage provider will look at 3 factors:
1.
Your income: This will include your basic income, income from your pension or investments,
earnings from a second job or freelance work, etc.
As evidence to support your financial position, you might be asked to provide payslips and
bank statements if you are employed.
If you are a self-employed individual, they might ask you to provide bank statements,
business accounts and details of income tax.
2.
Your expenses: The mortgage provider will be very interested in your outgoings or cash
outlays.
These include credit card payments, maintenance payments, insurance, utility bills, living
costs, healthcare expenditure, childcare expenses, etc.
Using this information, the mortgage providers will then assess if you have the capacity
to bear the repayments and interest payments.
If your expenses exceed your income, it will be a clear sign for them that you will default
on the mortgage payments.
3.
Future changes that might make an impact: The mortgage providers will also assess how
much “cushion” do you have if circumstances change.
For instance, if interest rates increase, you may lose your job, you may not be able
to work because you are sick, you had another baby or any other major event happens; these
events will adversely impact your ability to stay true to your mortgage payments.
Therefore, to buy a mortgage on a house, you must plan ahead and ensure that you fulfill
the above conditions or factors that the mortgage provider look at.
Make the Best Choice for Yourself Deciding whether or not to buy a house is
not easy, especially since there are pros and cons associated with each choice.
Ultimately, it will depend on the unique situation of each person involved in the decision-making
process.
A financial perspective Is just as important as all the other factors that will affect
this decision.
If you have personal factors like a career that demands constant relocation or you do
not have a permanent job, then a rental option will be the better option.
However, if there are no personal factors at play, then you might want to consider getting
a mortgage on a property.
So, thank you all so much for watching and before you go, remember to subscribe to the
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With that being said, have a great day and see you all in the next one!