Money Myth: Buying a House is Better Than Renting

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About 708,000 homes sold in the U.S. in July 2021, up about 1 percent from June, according to the U.S. Census Bureau. And this comes on the heels of a ravaging pandemic and its effect on the economy. A number of Americans were nonetheless buying houses, but was it a good idea? The choice between buying or renting a home can be a highly personal one, based on your goals and your situation.

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What’s the Market Like?

The median sales price for homes was ​$390,500​ in July 2021. Half of all homes sold for more than this, and half sold for less. That's a lot of money. It's possible that you won't have a choice between buying and renting in this kind of economic climate because you simply can't afford to buy what you want in the location you desire. Do you really want to settle for something less? A lot can depend on whether it's a buyer's market or a seller's market.

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Many experts advise that renting is the better financial choice even in a buyer-friendly economy. You're most likely going to have to come up with a significant amount of cash out of pocket if you buy, between the down payment and closing costs. Closing costs alone can run from ​2 to 5 percent​ of your purchase price. So you'll undoubtedly be more solvent for the foreseeable future if you opt to rent instead.

Consider also:How to Buy a House From a Family Member

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Mortgage Payments vs. Investing

A commonly debated issue is whether you should lay out all that cash to buy a home or invest the money instead, and renting might allow you to invest. Your monthly mortgage payment versus your monthly rent payment might be close to equal, or your rent payment might be much less if you opt-in for a long-term lease. And buying is going to eat up a lot more of your budget because you'll have other costs to consider, such as taxes, insurance and maintenance. Owning is going to take up a lot more of your budget on an ongoing basis.

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In all likelihood, your home is not going to appreciate as quickly as your investments, particularly when you factor in inflation. Let's say that you save $1,000 a month by renting. That's $12,000 by the end of a year. You invest that $12,000 and earn 8 percent in interest and dividends. Now you have $12,960 in one year's time. It might be impossible to achieve an 8 percent increase in your home's value during that same period of time because your mortgage payments during that first year are going to go predominantly toward interest. They're not going to whittle down your principal loan balance to help you build equity.

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Consider also:How to Calculate Appreciation

Your Job Outlook and Priorities

Your personal priorities and job outlook are another important consideration in the rent versus buy debate. Buying can create a major headache if you're even a bit inclined to pull up stakes and move to a new area in a few years, maybe because you've changed jobs. Experts suggest that it's almost impossible to even break even on a home purchase if you keep the property for only three years or less. The bottom line is that you'll be losing money if you don't stay put. That's money you might have invested instead.

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Credit Score Issues

Your credit score is a critical component in how much your mortgage payment is going to run each month because your interest rate is based on it. You might be faced with a scenario where you must not only be saving money for a down payment if you decide to buy, but you'll have to clear up some debt to bring your score up as well.

A security deposit on a rental is usually equivalent to one month's rent, or maybe a month and a half. Renting allows you to get into a new home with minimal cash outlay and pay down your credit card debt too, potentially making buying a home more feasible in the future.

Consider also:What Is the Minimum Credit Score to Buy a House?

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