Homeownership used to be part of the American dream, but times — and costs — have changed.
The percentage of U.S. households renting has increased dramatically since the Great Recession, and today there are more households renting than at any time since 1965, according to a recent study by the Pew Research Center. Young people continue to dominate the rental market, with 65 percent of households headed by people younger than 35 renting. But rental rates have increased across all demographic groups, according to the Pew study, because there are good reasons why you should rent your next home.
Click here to read about a realtor’s experience with home-buying mistakes.
One reason millennials lean toward rentals could be the high costs in the housing market, especially for millennial buyers. In the first quarter of 2018, 41 percent of housing markets were less affordable than their historic averages according to ATTOM Data Solutions, a real estate data company. On the other hand, more people might choose to rent instead of buy simply because they want to, said Todd Barton, managing director of property management company Renters Warehouse Atlanta. “The American dream has changed,” he said.
Between high maintenance costs, insurance premiums and property taxes, you might want to rethink that desire for homeownership.
Last updated August 28, 2019.
1. Your Mortgage Might Exceed Your Rent
One reason for renting is simply that it’s cheaper than owning a home — though owners can save tons on home upgrades with proper planning. If you’re weighing your options, Barton suggests totaling all rent costs — including the monthly rent payment, deposits, pet fees and service charges — and then comparing that figure to the total mortgage payment on an equivalent property.
In fact, a recent GOBankingRates study of rent and mortgage costs found it’s cheaper to rent in 11 states across the country, plus the District of Columbia. Adding up all your rental costs will help you determine whether owning a property is really more affordable.
2. Property Taxes Can Be Sky-High
If you live in a state with high property taxes, homeownership could be less affordable than renting — even if average mortgage costs are lower than average rents. There are things every homeowner should know about property taxes.
According to the Tax Foundation, the three states with the highest property tax rates all exceed 2 percent, with New Jersey at 2.38 percent, Illinois at 2.32 percent and New Hampshire at 2.15 percent. At New Jersey’s current median home value of $313,560, that means paying $7,463 in property taxes.
Keep in mind, though, that renting might not save you completely from high property taxes since some of those costs likely will be passed on to you by the owner of your unit. Luckily, as a renter, you can often find a cheaper place to live if your landlord bumps your rent too high.
3. You’ll Have to Buy Homeowners Insurance
Homeowners insurance varies depending on what insurance company you use, how much your home is worth and the claims history in your area, among other factors. But whatever your situation, insurance will cost something — and it’s just another cost to tack onto your cost of living. Learn exactly what homeowners insurance covers.
“Homeownership is a long-term financial commitment,” said Jose Tijam, a Los Angeles realtor. “Your lender requires you to insure your property, and typically you have to pay insurance premiums along with your mortgage payment.”
4. The Market Is Volatile
Is the U.S. on the verge of another real estate bubble? Maybe not, but in 2007, many homeowners found out the hard way that housing prices can be variable. Homeowners who bought at the peak in 2006 faced huge losses in 2008.
Home values and costs are variable depending on market fluctuations. That means you might spend more money on your home than it will be worth when you’re ready to sell.
“There’s no guarantee that your home will increase in value over time,” said Tijam.
5. Maintenance Can Break Your Budget
Will you be able to pay to replace the furnace if it breaks? Can you afford to repair or replace the roof if it leaks?
Some experts recommend you set aside 1 percent of the purchase price of your home each year to pay for maintenance and repair costs. That amounts to $3,000 every year if your home cost $300,000. If your home is older, though, you’ll want to set aside even more.
Renters, on the other hand, get to call their landlords to handle repairs around the unit. When you sign your lease, you can even ask for a fresh coat of paint, which, for the average home, costs $2,770, according to HomeAdvisor, rather than hiring painters or going the DIY route.
While some of these costs might be passed on to you as a renter, it likely won’t be until it’s time to renegotiate your lease. But the cost isn’t necessarily the worst part of required homeownership maintenance.
“If you don’t want to do yard work, renovations and upkeep, renting might be the best option for convenience,” said Barton.
6. Selling a Home Is Burdensome
Nobody wants to be saddled with an extra mortgage or home they can’t afford. Renting allows the flexibility to leave if your financial or life situation changes. But if you own a home and have to leave for any reason, you’ll end up having to pay for that home — mortgage, taxes, maintenance and all — until you’re able to sell.
If you’re not planning to stay in the same place for more than a few years, you should rent to avoid serious financial problems, said Deb Tomaro, a broker associate with RE/MAX Acclaimed Properties in Bloomington, Ind.
The worst time to buy is when your job or life situation is unstable. For example, Tomaro said she worked with a client who was going through a divorce and was set on buying a new home immediately after moving out of the marital home. An unstable period like that isn’t the time to make such a huge financial decision, she said.
“I know he’s going through a tough time in his life, but he doesn’t have the same excitement about the home-buying process that most people have, and that is disappointing to me,” she said. “That’s usually a sign that it’s not quite the right time to buy.”
7. It’s Easy to Overspend
When you buy a house, it can be tempting to extend your purchase price beyond what you can actually afford. For example, you might be tempted by an adjustable-rate mortgage with a low introductory rate, and tell yourself that you’ll get a big raise before the rate goes up in a few years. But, if that raise never comes, you could have to make serious cuts to other areas of your budget just to keep a roof over your head. If you stick to renting, you can move at the end of your lease to a nicer place if your finances have improved or to a more affordable residence if your situation has changed.
8. Your Down Payment Could Earn More Elsewhere
Historically, buying a home isn’t the best performing investment for your hard-earned cash, appreciating at only 3 percent per year. On the other hand, since its inception in 1926, the S&P 500 has returned an average of 9.8 percent per year, according to CNBC.
Yes, both stocks and homes can also lose value. But, with stocks, when you sell, at least you can deduct the loss on your tax return. You can’t deduct the loss on the sale of your home if the market tanks.
9. A Mortgage Might Not Lower Your Taxes
Mortgage interest only reduces your taxable income rather than your tax bill, so the amount you save depends on your marginal tax rate. For example, if you fall in the 25 percent tax bracket, you’ll save 25 cents in taxes for every dollar you pay in interest. Plus, to claim the mortgage interest deduction, you must itemize your deductions. This means you must give up the standard deduction, which is $12,000 for singles, $18,000 for heads of household, and $24,000 for couples filing jointly.
Other itemized deductions include state and local income taxes, real estate taxes and charitable contributions. So, your mortgage interest deduction only reduces your tax bill to the extent that your itemized deductions exceed your standard deduction.
10. You Might Not Be Able to Move
If you need to move for any reason, whether your company relocated you or you just found another house or neighborhood you like more, expect to pay a 5 percent or 6 percent commission to the real estate agents, plus potentially chipping in for closing costs, depending on your market. For example, if you have to sell your $200,000 home, even if you can get the full asking price, $12,000 plus closing costs will be deducted, which could easily offset any short-term savings of renting.
Plus, if you are offered a dream job — or even just a better opportunity — in another city, you might have to turn down the opportunity if you are tied to a house you can’t sell.
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Last updated August 28, 2019.