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The important question for millennials – and potential first-time homebuyers in general – is whether it makes more sense to buy or rent their next home.



Renting vs. Buying: Pros and Cons

March 13, 2019
By Comerica Bank

Despite their significant spending power, U.S. millennials are more reticent than previous generations to put those finances toward buying a house. Only 37 percent of millennials between the ages of 24 and 35 own a house, compared to 45 percent of baby boomers and Gen Xers, according to CNBC®.

Many factors may contribute to this generational disparity. However, the important question for millennials – and potential first-time homebuyers in general – is whether it makes more sense to buy or rent their next home.

Renting: Pros and cons

Pros 

The main benefit of renting property is that it requires less upfront investment and less commitment than buying it.

Landlords typically demand first month's rent, a security deposit and, sometimes, last month's rent. By comparison, a mortgage requires a down payment of preferably 20 percent of the value of the property. An FHA home loan allows for a down payment of as little as 3.5 percent, but the borrower still has to commit to the property for a longer term than for rent. Additionally, any mortgage with a down payment less than 20 percent requires private mortgage insurance (PMI), which usually costs between 0.5 percent and 1 percent of the full loan amount per year, according to Investopedia®.

Renting is also less work than home ownership. The renter does not need to worry about property maintenance or purchasing new appliances. The monthly cost is predictable, and leases typically expire after a year. Renting may therefore be the more suitable option for someone who is not ready to commit to a particular geography for any longer than a few years.

Cons 

The biggest downside of renting is the sunk cost. Rather than putting monthly payments toward actually owning something of value, each rent check is money that you cannot get back. Conversely, your monthly mortgage will help you build equity in a home. It's also worth noting that some landlords require tenants to sign through a rental agency that will charge an equivalent fee of one month's rent. Other costs to consider when renting include utilities, parking fees, application fees, renter's insurance, fees for early termination of the lease, and more.

Another downside of renting is that you usually cannot renovate the property to make it a more suitable living space for you, your partner and your family. So, while you are not as bound to the property as if you owned it, you are bound to its state and condition.

Buying: Pros and cons

Pros

The main benefit of buying a property is that it's a tangible, long-term investment. Every mortgage payment you make goes toward equity in your home, which has value that can be tapped through various mortgage refinancing options. In other words, your monthly payments don't just go into a vacuum as they would with renting. The closer you come to paying off your home, the better your equity. Once you have paid off your mortgage completely, the only recurring expenses will be property taxes, maintenance costs, utilities and so on.

Property also tends to increase its value over time, allowing you to eventually profit on the sale of your house should you choose to relocate. As long as you have used that property as your living space, you most likely will not have to pay capital gains taxes, meaning you get to pocket the profits. Homeowners can also deduct the interest on a mortgage of up to $750,000. Property taxes, private mortgage insurance and home equity loan interests also qualify for tax deductions.

Other key benefits of buying a home instead of renting include:

  • You can rent part or all of the property out if necessary.

  • Your family cannot get "priced out" of the neighborhood if rental prices increase.

  • You could improve your credit score by making on-time payments.

Cons

The main con of buying a house is that you need a cash down payment of 20 percent or more if you don't want to pay for private mortgage insurance. This does not count closing costs associated with buying a home and taking out a mortgage.

Another downside is that it's more difficult to move once you've purchased a home. There is greater stability in owning a home, but at the cost of some flexibility. You will likely need to sell your property before moving into another. Even then, the sale price will need to be greater than your remaining mortgage, meaning you may be at risk of taking a loss if you sell too soon after buying.

Homeowners are responsible for handling maintenance and upkeep on the property, including the replacement of broken appliances. They also need to factor in insurance, utilities, pest control, lawn care and other expenses. Beyond just the costs, homeowners will also need to dedicate a significant amount of time to caring for their property.

Making the right decision

Homeownership is clearly dependent on a variety of circumstances, including your desired level of mobility and whether or not you're content paying rent with no promise of return on investment.

If you're a potential first-time homebuyer, contact Comerica Bank to discuss your options

 

 

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, compliance or accounting advice. You should consult your own tax, legal, compliance and accounting advisors before engaging in any transaction.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.