Where to Live - Buy, Rent or Back Home
"Should I rent or buy?"
That was the question Jake faced after securing a good paying job. He had some money saved but realized he needed to weigh the pros and cons of renting versus buying, and whether it made sense to move back home to save more for a down payment.
Buying a home is one of the largest purchases most people will make. Several factors influence the decision-making process for this major investment and renting may be the better choice depending on the amount of money saved and other individual circumstances.
Consider the pros and cons of the options:
- No long term commitment - the lease might be for one year versus 15-30 years for a mortgage
- No need to sell a home - if relocating quickly and the economy is not good, selling property might be time consuming and therefore inconvenient
- No need to have a large amount of cash available - to rent, a security deposit, which could be the equivalent of one to two month’s rent, is required versus 20% for a down payment when purchasing
- Landlord is responsible for major repairs and property maintenance
- Simpler process
- No equity accumulates in a home - rent doesn’t go to the investment of owning a home
- No tax advantages
- May not be able to paint the walls or make other decorative changes
- Rent may increase when lease expires
- A co-signer may be needed if income is not stable of if the renter is young. Other fees, such as a credit check, may be assessed
- It is your own place - this is a dream for many people
- Often a good investment over the long term
- Tax benefits - interest and property taxes are deductible on primary residences for federal income tax returns; may also be deductible on some state income tax returns
- Can make decorative changes and/or additions that are permitted by a homeowner’s association and county regulations to better fit a particular life style
- Several costs will be incurred, such as insurance and various fees, in addition to the mortgage
- Responsible for all repairs and property maintenance, which can be costly
- May have difficulty selling home if market is saturated or the economy is not good
Moving Back Home:
- May live rent free or only asked to pay a small amount
- Ability to save more of income for a down payment or a place to rent
- May enjoy being with family, having meals together
- Lack of privacy - opportunity to entertain may be limited
- Readjustment to living back with family versus living on your own
- May need to abide by house rules
There are clearly many trade-offs for each option. Part of the decision-making process should also include these important considerations:
- Obtaining renter's insurance - this protects personal property in the event of fire, theft or damages to the building
- Utilities - these costs need to be factored in when determining how much money will be needed each month
- Mortgage insurance - borrowers must pay for this insurance unless there is a 20% down payment. Would it be better to wait to buy?
- Costs of owning a home - in addition to the monthly payment that includes interest, there are:
- Closing costs, estimated at 3.5% of purchase price
- Down payment, usually 20%, otherwise mortgage insurance
- Property taxes and insurance
- Condo or home owner's association fee
- Property maintenance
If Living Back at Home:
- Ability to save money - it is important to realize this opportunity is not a free ride where money is spent frivolously. Rent can be paid to family members and dollars put away for a future home.
It may be that sufficient funds are not available for rent or a down payment on a home at this time. However, there are alternatives, such as having a roommate, to make living on your own feasible. Exploring other possibilities is a worthwhile exercise.
What is the Best Option?
Ultimately, the question to ask is: "What best fits my financial situation, life style, preferences, and stress level?" Then work out a budget to meet those goals. Use this Budget Worksheet to see what expenses to expect.
Try This Out:
Use this Buy vs. Rent Calculator to compare monthly expenses when buying or renting.
*Disclaimer: Individual situations will vary. This tool provides estimates only.
For additional resources, check out: