If you're debating whether to sign a lease or sign a mortgage, you've likely heard this old adage: Why rent when you can own? For a long time, owning appeared the more promising option for fence-sitters. Home ownership in America rose to record levels in recent years, amid an environment where mortgage lending rules were generous, homes were appreciating rapidly, and consumers were thus motivated to purchase property because lenders made it easy and appreciation made the potential for gains clear-cut.
But starting in 2007, home price appreciation reversed in many markets and slowed in others, reducing appreciation and equity as an incentive to own. Separately, mortgage lending rules grew more conservative, meaning many would-be buyers couldn't qualify for best-advertised rates. Add to that the influx of harder-to-purchase distressed property (foreclosures, short sales) that are now part of America's for-sale home inventory, and the route to owning is less clear-cut than before. Yes, the government has been offering tax credits to first-time buyers to make buying inexpensive and stimulate the economy. But for some people, renting and taking a watch-and-wait attitude may make more sense than moving forward with a buy.
Trulia's Mortgage center offers a calculator that you can use for an objective opinion on whether you can afford to buy or whether renting is better for your particular situation.
If you haven't been regularly employed in the past two or three years, have a history of paying bills late, long-term debt (like car payments and other loans), lack of savings for a down payment, and live paycheck to paycheck, chances are you're better off renting rather than owning. Renting provides an opportunity to control housing expenses (you pay the rent, but the landlord handles costly maintenance and repairs) and lets you build your savings and credit profile. Got a below-average credit score? Consider this: Landlords may ask you for extra deposit due to your score, but they can't charge higher rent because of it. Mortgage lenders, however, can charge you higher interest rates on your monthly home payments due to your low score.
If you're not sure you can stay in one place for more than four yearsâ€”a minimum time recommended by some to break even on the purchase and sale of a homeâ€”then renting may make more economic sense than owning. On the personal front, if you suspect your work might ask you to relocate or you're seeking a new job, the flexibility of a lease may be preferable to owning and having to sell (or rent out) your property from afar. If your financial circumstances are secure but big changes are on the horizon (divorce, graduate school, having a child, sending a child to college), renting can provide predictable and lower housing costs than owning over the short-term, until your new financial scenario is clearer.
In many markets around the country, rental prices have dropped. In some cases, builders are converting new construction that failed to sell or apartments slated for condo conversions back into rental properties, making premium rentals available. Also, some landlords will offer concessionsâ€”free utilities or parking, a months free rent on a one-year leaseâ€”in an effort to secure long-term rental contracts. All of this favors renters.
The good news about the bad market, some say, is that home prices are low and affordable. But the bad news is that timing when to buy into such a market is difficult: No one wants to buy a place and then watch their equity drop as prices continue to stumble, and no one wants to buy a place only to see zero appreciation over the next five or ten years. In some markets around the United States, builders have over-produced housingâ€”meaning there's a lot of inventory unsold or yet to be completed. Suburban "ghost towns" and cranes towering over stalled condo towers and office buildings are signs your market hasn't begun a rebound.
Homeownership calls for financial responsibilityâ€”and requires savings for emergencies that don't tend to come up when you rent. You become the landlord when you own, which means you're on the hook to pay for major and minor repairs, grapple with your insurer, or call up warranty programs. Maybe you can only afford to buy a "fixer," meaning you'll have to learn to work with contractors or learn to take a DIY approach. Or perhaps you can buy a new condo, but are nervous about "special assessments" and extra homeowners association dues that might eat into your savings. Aside from financing your property, owning a home also requires timeâ€”and that's what many renters can't spare. If you travel frequently and the thought of maintaining your landscape and swapping out furnace filters sounds like too much, or you dread the thought of hiring contractors or other helpers to do the work you can't, renting may be a wiser option.