Making smart choices about your living situation will have a big impact over the long term on your finances. A lot of consumers aren’t sure whether it’s best for them to rent or buy a home in their particular situations. It’s hard to provide a simple rule for which is preferable.
While you build equity in your home when you pay off a mortgage, you also have to handle a lot of additional expenses yourself like property taxes and home repairs. At the same time, you do get to take advantage of some tax write-offs when you’re paying off a mortgage.
For a lot of consumers, whether or not they should buy a home depends on their age and financial situation. Generally speaking, younger consumers are better off renting while older consumers probably want to take advantage of the financial incentives to own a home.
Renting when you’re young
Those who are able to be approved for a mortgage loan need to have relatively good credit and also have built up some savings in order to be able to put a down payment on a home. These things are sometimes not financially feasible for younger consumers. Younger consumers tend to have lower incomes and haven’t been working long enough to acquire as much in savings as older consumers.
Another reason why home ownership is sometimes not possible or the best idea for younger consumers is because younger consumers are more likely to move around. Younger consumers are in many cases still establishing their careers. They are more likely to have to relocate. Relocating can be a big problem once you’ve bought a home because it generally requires you to sell your home.
At the same time, there are quite a few disadvantages to renting that younger consumers who are unable to buy a home just have to deal with. Rent money is lost every month and doesn’t help to build up equity in a property. While there are financial disadvantages to renting, renters also have less responsibility over their properties. They can simply call up the landlord to handle repair needs when necessary and don’t have to foot the bill. For the moment, renting is a less expensive living situation that doesn’t involve as much responsibility.
Enjoying the benefits of homeownership
Once you’re in stable condition financially and you have some savings built up, it’s time to start thinking about home ownership. Before you can even think about it, however, you’re going to have to make sure that your credit score is high enough that you can be approved for a mortgage loan.
Before you buy a home, you need to be actually certain that your income level is not going to face any sudden shocks that will decrease it. You need to be able to count on income coming in well into the future so that you know that you’ll be able to make your mortgage payments. Defaulting on a home loan is a big problems and can devastate your credit for years to come.
When you buy a home, you’ll be able to take advantage that each payment you make will increase your equity in your home. Once you stop making payments, you own a house and you’ll be able to sell it in order to get all the money you put into your house back.
At the same time, you’ll also be able to take advantage of numerous tax benefits as a homeowner. When you’re making payments on a mortgage loan, you get to claim a tax credit for all of the interest you pay on your mortgage loan. There are a few other tax benefits and tax deductions that go along with home ownership. You get to write off the points you pay on your mortgage loan as well as the cost of all the property taxes you have to pay in order to own your home. The other big tax deduction you can claim when you are a homeowner is a deduction for any costs you have had to incur in order to pay for the insurance on your mortgage.
The tax benefits of owning a home are also particularly appealing and applicable to older consumers because older consumers tend to have higher incomes and therefore higher tax liabilities. Younger consumers might not benefit as much from home ownership tax credits because they might not itemize deductions or they may be in lower tax brackets and therefore have to pay a smaller percentage of their income as taxes.
Deciding for yourself
In the end, you must make your own decision on whether you want to rent or buy. If you can afford to buy, it’s generally good to do so if you know you’re not going to be relocating and you know your income is secure.
However, you need to carefully evaluate your options and make sure that you can get a decent mortgage loan with a manageable interest rate before you commit to home ownership.