American Dream or Bust- Rent vs Buy, What’s Right for You?


There was a day when owning a home was the foundation of the American Dream. Times have changed to a certain degree. There are more people renting in the United States than in anytime in the last 50 years, according to a recent poll from Pew Research Center.

For many of us, living the American Dream is about having enough money in our bank account to do things we want to do. This may mean that it is financially better to rent than buy, in some situations. If you are thinking about the American Dream of owning a home, or renting, you should ask yourself the following questions. Once you have the answers, you should have a good idea whether buying or renting is right for you in 2018.

How Long Are You Going to Stay?

Deciding if renting or buying your home in 2018 often comes down to good old-fashioned timing. Finding a home you can afford and making a profit on it down the road will depend largely upon when you buy (either in the up or down cycle) and how long you plan to stay there. Zillow tells us the current average home price in Bothell WA is nearly $700,000, and the average cost for a rental of the same size is $2500. If you make a down payment of 20% or have a rental increase of 5% per year, you would have to own the house for a minimum of two years before it is a smart financial move.

But it is important to remember that not all housing markets in the US are booming like the Pacific Northwest. In fact, 2/3 of homes across the US have not still have not gotten back to their level before the last recession. It is possible that some owners who want to sell and cash out may have to wait years longer before they can make a profit. Carrying debt is always somewhat of a financial risk; if you lose your job, get hurt or have a reduction of hours, you could lose your home and ruin your credit.

On the other hand, having a 12-month lease gives you more freedom to move when you like and to change your housing expenses based upon your income and needs at that moment. A fixed rate mortgage is pretty much set in stone.

Have You Looked at All of the Costs?

It is helpful to compare the price of renting and buying a similar home in a similar neighborhood. But there are plenty of hidden costs with each choice. For a person renting a home, the costs are not developing home equity and not being able to claim the tax breaks associated with owning a home.

For instance, let’s say you are a New York homeowner and are in the 28% income bracket for tax purposes. If you have a $200,000 loan with a 4.5% rate, you may be able to get more than $3,500 in tax breaks. You also will have expenses that renters do not have, such as:

  • Homeowner’s insurance: If you have a mortgage, you are required to have insurance on the home. If you have a home worth $200,000, you can expect to pay $700 or $1000 per year for coverage. But renter’s insurance may be only $20 per month or so.
  • PMI: If you put less than 20% down and/or have less than 20% equity, you must have private mortgage insurance. If you have a $200,000 home, you could pay $150 or $175 more per month for PMI. That cost will stay there at least until you have 20% equity; if you have an FHA loan, you might have to pay that for the entire life of the loan.
  • Property taxes: The average American homeowner pays $2100 per year in property taxes, and some areas pay much more. But keep in mind that property tax costs are built into rental prices. Your landlord pays property taxes, and so do you indirectly.
  • Maintenance: Homeowners have to pay out an average of $175 per month for maintenance. That does not include a major repair such as a roof or air conditioner. With the above average costs, you could easily pay $7000 or more per year, which is more than you save in tax breaks. As a renter you do not have these other expenses.

Also, note that the federal tax laws have changed in 2018 that are increasing the size of the standard deduction. This may make it more worth it to continue to be a renter, as the tax breaks homeowners get may not be as significant. Also, only $10,000 of state and local taxes can be written off taxes for homeowners now. This will cost people living in higher tax states who own a home.

Are You Really Throwing Money Away on Rent?

Many say that you are throwing money down the toilet with rent. But this assumes that building equity in a property is the best way to make money. This is not necessarily the case in many parts of the US. It is true that the equity you can grow in a home may be valuable in many cases.

The fact is that owning your own home in many states is more expensive than renting, and spending too much on your home can affect how much you can save for your retirement.

Also note the average American family has only $5,000 in savings, and couples from 50 to 55 only have approximately $125,000 for their retirement. If owning your own home prevents you from saving for your golden years, you may want to consider renting instead.


References: Should You Rent or Buy a Home?  


With over two decades in the mortgage sectors, Mr. Dornan brings a lot of experience to the table. Bryan Dornan has founded several lending companies and written several hundred articles related to home financing, real estate and more.

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