More and more young professionals are pursuing the "American dream" by buying their first home. If you're a recent college grad or have spent a few years working and saving, you may be thinking about making your first home purchase. But is that the right step for you? Here are some things to consider.
Home buying experts are quick to tout the benefits of buying over renting. And it's true that buying and renting differ in many important ways -- but there are also some advantages to renting rather than buying. Here are some of the differences.
These are some of the things you should consider carefully before buying:
Buying means staying put. When you rent, you probably won't sign a lease longer than a year, giving you flexibility to move if you want to. But when you buy a house, you should plan on staying in it for at least three to five years, to recoup the initial costs of the purchase (around 2-5% of the purchase price). If the real estate market is dropping, it could take much longer for the value of your home to recover. You may have to stay put a long time to avoid a loss when selling.
Buying means less free time. Most buyers spend more time maintaining and improving their homes than they did their rentals. There's no landlord to call when the toilet leaks, for instance, so you'll either have to do these kinds of things yourself or be prepared to hire someone to do them for you. And keeping track of things like when to change the heating filter or get your regular termite inspection can pose a particular challenge if you've never had to think about this stuff.
The costs of buying include more than the mortgage payment. Don't compare the cost of buying to renting by looking at mortgage payments versus rental prices. Buying involves additional costs, including insurance, property taxes, and maintenance and repair costs. All these can add significantly to the expense of owning.
Here are some of the benefits of buying instead of renting.
You can personalize and customize your space. Your rental agreement will no longer stop you from tearing out a wall, changing the bathroom tile, or getting a dog, cat, or alligator. And of course, any improvements you make can increase the value of your property. You're not motivated to make those improvements in a rental, where they'll only benefit the landlord.
You get the increased value. Over time, the value of homes tends to increase (though it sometimes takes a long time, with some alarming downturns in between). When you sell, any return on your investment is yours to keep. As a renter, it belongs to the landlord.
Eventually, you won't have a mortgage payment. One of the biggest benefits of buying is that unlike renting, where you'll be writing a check every month forever, you can eventually pay off your mortgage entirely. Or, you'll be able to use the equity to buy your next house, and eventually pay that one off. And if you start investing early, the date you're done will be that much sooner.
You are allowed certain tax benefits. In addition to deducting mortgage interest and property taxes, which reduces your annual tax liability, in most cases you don't get taxed on most of the money you make from selling your home. For more information on these tax benefits, see Nolo's article Homeownership Tax Deductions.
Buying isn't for everyone, and it's especially important to be careful about making this choice when you're young and not sure where your life is headed. It doesn't make much sense to buy if:
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