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To buy or rent? Previous studies show that homeowners acquire more wealth than renters, and new research shows that renters still experience more financial instability than homeowners.
- Renters are at the mercy of local economies and their landlords
- Rent in many markets has grown much faster than median incomes
- Homeowners can control more of their costs by buying at today’s prices with fixed-rate mortgages
Buy or rent: what the research reveals
Is it better to buy or rent today? Recent data from several sources suggest that the former is preferred over the latter.
- The Urban Institute found that renters deal with greater money uncertainties than homeowners. More renters (28 percent) than owners (18 percent) lack confidence in being able to save $400 to cover an emergency expense. Renters (46 percent) are more likely than owners (36 percent) to have issues paying for housing, food, medical care and utilities
- Freddie Mac reveals that two out of three renters found it hard to pay their monthly bills over the last two years
- The Joint Center for Housing Studies of Harvard University (JCHS) reports that almost one out of three American households paid more than 30 percent of their incomes for housing in 2016. Renters alone paid 47 percent. Between 1960 and 2016, the national median increased by 60 percent
- A 2018 Journal of Economic Perspectives study demonstrates that that homeownership remains highly beneficial for most families as a way to build wealth vs. renting
- Some argue that you can accumulate more wealth by renting and investing money (otherwise spent on buying and owning) in stocks and bonds. But owning a home can actually yield higher returns than stocks and bonds, per the Urban Institute
- Per the Survey of Consumer Finances, the median net worth of owners was 46 times that of renters in 2016 ($231,420 vs. $5,200, respectively)
What the experts say
Real estate attorney Kara Cook believes the buy or rent question is easily answered. That’s because owning offers more benefits than renting, she says.
“You can build equity with home ownership,” says Cook. “At some point, you can potentially sell your home for a profit. Or, you can lease it out. Or you can use it for collateral on another loan or a reverse mortgage when you’re older.’
Plus, “You’re not at the mercy of a landlord. Especially if you don’t have a strict HOA, you can change your home and surroundings to your liking, for the most part,” she adds.
Keith Baker, Mortgage Banking Program coordinator and faculty at North Lake College, says owning also builds your credit rating.
“In addition, home buyers benefit from forced repayment of principal to accumulate equity,” he says. “This way, when they go into retirement, their housing costs are vastly reduced because the mortgage is paid off.”
Other owning advantages
What’s more, “Having a fixed-rate mortgage with a set payment every month is a hedge against rent increases,” says Baker.
Cook says this latter point is important. Increased demand for rentals leads to rental unit shortages. That drives up rental prices.
“Property prices also increase over time,” says Cook. “So if you’re renting and the building’s value goes up, your rent will increase when it’s time to renew your lease. But if you own a home with a fixed-rate mortgage, your principal and interest payment will remain the same.”
Another perk of owning? You may be able to take advantage of tax benefits if you qualify.
“And you can improve or upgrade the home you own to your tastes. You can have the pet you like, as well,” Baker notes.
Owning provides more privacy than renting. You’ll likely have more space in which to grow a family, too.
Is owning right for you?
Not everyone is cut out to be an owner. You have to save up enough for the down payment. You must qualify for a mortgage loan. You’ll need to accept the responsibility of fixing and maintaining your home as needed. And to recoup closing costs and other fees, you should be willing to stay put for a few years.
Consider, too, that “you could lose money if your home’s value declines,” Baker says.
Ask Ken Johnson, president of the American Real Estate Society, and he’ll tell you owning isn’t for everyone.
“In general, highly mobile people, great savers, and folks who are happy with a minimum of amenities should rent. The money they save should be reinvested into a portfolio of stocks and bonds,” says Johnson.
“But less disciplined savers, folks that like lots of amenities, and more settled people should own and build wealth through home equity,” he adds.
Buy or rent? The right answer for you will depend on your circumstances.
“You have to do your due diligence before deciding which is better for you,” says Johnson. He suggests checking the BH&J Index to make a more informed decision.
To help you choose, do the math and analyze your goals. Consider short- and long-term plans, like raising a family and building wealth. Also, consult experts who can help you weigh the pluses and minuses.
Improve your chances of buying
Often, there are two big reasons why people choose leasing over purchasing when deciding whether to buy or rent: they lack the down payment funds and/or they have a low credit score. The good news is that each of these problems are solvable.
First, there are down payment assistance (DPA) programs available, if you qualify. These come in the form of loans and grants, many of which don’t have to be repaid. A 2016 RealtyTrac study found those who used DPA programs were, on average, $17,766 better off over the lifetime of their mortgages than those who didn’t.
Second, you can improve your credit score with a little extra effort. Try these tips:
- Check your credit report. Get a free copy at annualcreditreport.com. Review carefully for any errors
- Notify the three credit bureaus about any errors you spot
- Pay down your revolving debt on credit cards, loans and other forms of debt
- Make your payments on time
- Apply for new credit carefully. Avoid applying for more than three new credit accounts in a single month
- Consider getting a secured credit card if other cards have turned you down. “A secured credit card can, if used wisely, improve your credit score so you can more easily get a mortgage,” Baker says
Third, choose the right program. In general, government-backed loans make buying easier for those with smaller down payments or blemishes on their credit rating. But conventional (non-government) loans are often less-expensive if you have a larger down payment and sterling credit.