Calculate your expenses
Before we get into the thick of the debate, it’s best to check your monthly earnings and outgoings so you know what you can afford, and what your monthly budget is. For UK residents, a great option is MortgageCalculator to help quantify your interest, capital, and mortgage balance when deciding between renting, or becoming a homeowner.
Why you should buy
First off, becoming a homeowner comes with intangible benefits. It includes a sense of stability, belonging to a community of homeowners across your neighborhood, and having pride of ownership. It also comes with the tangible benefits such as tax deductions and equity. Owning your own house is a solid step to building wealth in the long run. Plus, you call the shots, you pick the décor, and you can have as many pets as you want. It is you who benefits from increasing your home’s value instead of a landlord, especially if you’re looking to sell in the future.
Mortgage rates are currently at a record low, and are set to remain that way for at least the next two to three years, just in case you want to wait a little while before you’ve saved up enough cash. According to The National Association of Realtors, the estimated mortgage rates will average at 3.1% in 2021, whereas the Mortgage Bankers Association predicts the average rate to be 3.3% in 2021.
Making a 20% down payment to buy your house isn’t actually necessary – you can put down less with some lenders. However, this comes at the cost of being hit with Private Mortgage Insurance (PMI). PMI protects the lender with a premium attached to your monthly cost, but it’s not a deal breaker despite making your home owning experience a little more expensive. The safe bet is to save up for a 20% down payment, but if you can’t afford that within the next couple years and you’re looking to buy, becoming a homeowner is still possible.
As aforementioned, building equity is an important part of owning your own home because you get something back for your troubles. Paying that 20% of your home’s value allows you to build that equity much quicker – which is great because it also allows you to borrow against that equity in the event that unplanned expenses arise; whether that be home-related or otherwise. If you’re scared of going underwater or drowning in mortgage payments, paying the 20% lowers those chances significantly. That’s just in case your outstanding loan balance becomes worth more than the selling price of your home.
Why you should rent
To start with, here’s a list of expenses that homeowners have to pay, which renters don’t have to worry about:
- Homeowners insurance
- Property taxes
- Maintenance and repairs
- Water and sewer service
- Pest control
- Earthquake insurance in certain areas
- Tree trimming
- Pool cleaning
- Trash pickup
- Flood insurance from your lender in certain areas
With a landlord, none of these expenses are an issue, as they will be taken care of for you, or they’re just inapplicable altogether. Your monthly rent is likely to be locked in and set, so there’s no need to worry about unpleasant and costly surprises coming your way.
If your job is unstable right now – as a lot of things are in 2021 – it may be best to wait another year or so to become a homeowner, but in the meantime you can definitely rent. Especially since there are major inflations of prices for homes this year. For example, many properties that would usually be worth $300,000 tend to be worth around $350,000 as of recent. Furthermore, property taxes, maintenance, repairs and homeowners insurance can be a lot more expensive. Having a fluctuating wage can be very troublesome as a homeowner in 2021, but as a renter, none of this is an issue as long as you can afford your monthly set amount.
The flexibility offered by renting, and the predictable monthly expenses is great for anyone too unsure about their decision between renting and buying, particularly for those with potentially unstable incomes. As an illiquid asset, you may be unable to sell a house if the housing market is not in your favor; and even when it is, you’ll be hit with significant transaction costs when selling. It’s far more expensive to change your mind about your living situation when you’re owning, whereas renting is a great short to mid term option, and you still have the option of buying your rented property in the future.
Although renting may be favorable this year, it really is subjective and determined by your financial situation which housing situation is more suited to your needs. Again, just make sure to do your research, and use a mortgage calculator if you have any doubts.