Are you thinking about renting a house for a year to avoid the current housing market? You might want to rethink your options, as renting may not be in your best interest.
Renting may seem like the better option up front, but it’s much more expensive than you may think. For example, when you are renting a house, you are not gaining any equity with your monthly payment, so when the time comes to move out of the house you do not have the option to sell the house or get back any money that you’ve spent living there.
If you are thinking about renting to wait out the rising housing market, that also can be more expansive than buying a house now. When you buy a home, the interest rate locks into a 30-year mortgage and the payment does not change unless you refinance, which can lower the payment, or your property taxes and insurance fluctuate. When renting, however, the price historically increases year over year. We’ll talk more about that in the next section.
Renting doesn’t come without risks. Landlords can decide to sell their home or make it unavailable to rent whenever they choose, leaving you to find new living arrangements. Look closely at your rental agreement or lease to understand the notice period, or how much time in advance your landlord must notify you, should they choose not to renew your lease or plan to vacate tenants.
Landlords often raise rates to keep pace with rental pricesand demand in the area or to offset inflation. That means once your original lease is up, you could be forced to accept the higher rate or move again. In 2019, 78% of renters reported a rent increase and more than half said it affected their decisions to move.
Renting may leave you with little room for upgrades to your space. Most landlords don’t allow or will require approval for modifications, such as painting walls or even hanging artwork. If you do make changes, it will likely be up to you to put everything back to the way it was by the time your lease is up, or you could forfeit your security deposit. Not to mention your furry friends may not be allowed in certain rentals or will cost you extra.
When it comes down to it, the biggest drawback of renting is that you’re paying money that goes directly into your landlord's pocket.Even if they must pay a mortgage on the property, they are still earning home equity as they pay down the loan principal and the property appreciates in value. Meanwhile, you won’t get any benefits beyond being able to stay put for another month.
While it may not seem like a big deal, rent payments add up. According to Apartment Guide’s most recent Annual Rent Report, the average monthly rent for a 2-bedroom apartment in 2019 was just over $1,800. That means after a one-year lease, you would have paid more than $21,600 in rent—for which you’d receive no benefit of equity or ownership.
If that seems like money you’d rather put toward a property of your own, one that generates potential long-term equity and wealth, then read on.
As a property owner, you get to decide how long you’d like to live in your home—and when you’d like to sell. This can be especially important if you need longer-term security in a fixed location. For example, if you have or are planning to have kids, you may want to remain in a specific school district for the foreseeable future. Owning a home makes it easy. Renting, on the other hand, doesn’t come with that same level of security; you may have to suddenly find a new home in a new location if your landlord decides to sell.
Currently, interest rates are rising and that can be a big deterrent for buying a home. Don’t let that scare you out of buying though! If you have a fixed-rate mortgage, you’ll also have peace of mind that your payments won’t go up every year—unlike renting a home where you may see annual rent increases. While your home’s property taxes and insurance may fluctuate, your principal and interest will remain the same for the full term of your home loan. For example, if you have a 30-year fixed-rate mortgage, your payments will remain the same for the full 30 years, regardless of property values, inflation, or rising interest rates.
When you own a home, you can let your HGTV home goals run wild. You can paint the cabinets, change light fixtures, and even remove walls for some open concept living. Not only that, but as you make renovations to improve your home, you may also increase its value, depending on the kind of renovation. This can be beneficial if you decide to move or refinance in the future, or simply want the home to increase in market value when compared to other homes in the area.
Every time you make a mortgage payment, you are building equity in your home. Equity is the difference between the current market value of the house minus the remaining balance of any outstanding loan. As your mortgage balance decreases, the amount of equity you have in the home increases. But this isn’t the only way equity can grow.
Appreciation, which is the influence of the market upon value through demand, inflation, or both, can also cause equity to grow. For example, the market value of your home may increase when comparable homes in your neighborhood begin to sell for more than what you originally paid. And because inflation cannot affect the balance of your loan, equity may increase exponentially.
Eventually, you may wish to leverage that equity to buy a second home or fund other financial goals or investments—such as making improvements to your home.
Reach out to our preferred lender Tidewater Mortgage Servicesto learn how you can buy a home!
