• Evaluate the pros and cons of renting and homeownership
• Calculate the monthly payment and interest expenses of a mortgage
• Interpret and understand an amortization schedule

In the journey of life, one significant decision many people face is choosing between renting and owning a home. Both paths have their own unique set of advantages and disadvantages. To make the most informed decision, you’ll need to understand the implications of each option in terms of financial, personal, and lifestyle factors.

Advantages and Disadvantages of Renting

When renting, you will likely sign a lease, which is a contract between a renter and a landlord. The lease will detail your responsibilities, restrictions on activities, deposits, fees, maintenance, repairs, and rent during the term of the lease. It also defines what your landlord can, and cannot, do with the property while you occupy the property.

Like leasing a car, there are advantages to renting but also some disadvantages. Some advantages are:

• Lower cost: Renters don’t need to worry about property taxes and homeowners’ insurance (though renters’ insurance is a good idea). Additionally, the initial cost of renting is usually lower than the down payment for buying a house.
• Little to no maintenance cost: The landlord pays for or performs most maintenance. If the furnace breaks or the roof leaks, it’s the landlord’s duty to fix it.
• Flexibility: lease terms are usually shorter than a mortgage term. This makes it easier for renters to relocate for work, family, or personal reasons.
• Amenities: If renting in an apartment complex, there may be a pool, gym, or community room for renters to use.

Of course, there are disadvantage too:

• No tax incentives: In many jurisdictions, homeowners can deduct mortgage interest and property tax payments from their taxable income. These tax cuts do not apply to renters.
• Rising rent: The cost of rent may increase over time, subject to market conditions and the landlord’s discretion.
• No equity: Rent payments don’t contribute to building equity or ownership in a property.
• Restrictions on occupants: There may be a limit on how many can live in the apartment.
• Restrictions on decorating: The property is not yours, so any decorating or improvements need landlord permission.
• Limits on pets: Permission for pets, and their number and type, will be set forth in the lease.
• Uncertainty: You may not be able to remain when lease term is over. The landlord can, at the end of your lease, invite you to leave. The building may be sold, and the new landlord may institute changes to the lease when the previous lease expires.

Renting has fees to be paid at the start of the lease. Typically, when you rent, you will pay first and last months’ rent and a security deposit.  The deposit will cover repairs for damage to the apartment during the renter’s stay but may be returned if the apartment is in good condition. If your landlord runs a credit check on you, the landlord may charge you for that as well.

Advantages and Disadvantages of Buying a Home

The advantages to buying a home mirror the disadvantages of renting, and the disadvantages of home ownership mirror the advantages of renting.

Some advantages to home ownership are:

• Tax advantages: The interest you pay for your mortgage (more on that later) is deductible on your federal income tax.
• Unrestricted occupancy and pets: There are no restrictions on pets or occupants, unless laws in your area specify limits for homes.
• Control: You can redecorate any way you wish, limited only by the laws in your area.
• Fixed housing cost: Once your mortgage is set with a fixed-interest rate, your housing cost will stay the same over time.
• Investment Potential: Your home grows equity, that is, the difference between what you owe and what the house is worth grows. You can use the equity to secure loans, and you recover the equity (and more if you’re fortunate) when you sell the house.
• Stability: As long as you pay your mortgage and maintain the home to the standards of your community, you can stay as long as you wish.

Some disadvantages to home ownership are:

• Higher cost: The cost is higher than renting. Mortgages and associated costs are typically higher than rent for a similar living space.
• Responsibility for maintenance and repairs: The owner is responsible for upkeep, maintenance, and repairs. These can be extremely costly.
• Less mobility: The owner cannot walk away from the property. It can be sold, but simply leaving the property, especially if not paid off yet, has serious consequences.

The decision between renting and owning a home is multifaceted, encompassing financial considerations, lifestyle preferences, and future plans. By understanding the pros and cons of each option, you can make a decision that best aligns with your personal circumstances and long-term goals.

Closing Costs

It is important to know when buying a home there is a closing cost that is associated with the purchase. When a home is bought, there are many costs that need to be paid at the time of purchase, which are lumped under the term closing costs. 

At the start of 2022, the average closing costs for a single-family home exceeded [latex]$6,800[/latex].

These costs include:

• The appraisal fee, which is what is paid to someone to establish the home’s worth. The value of the home to the bank may differ from what the home is listed for, or what an app tells you the home is worth. It may run approximately [latex]$350[/latex].
• The home inspection fee. The inspection should reveal any problems with the house that will need to be fixed either before or after you obtain the home.
• The title search. This is a records search to ensure there are no issues with who actually owns the property. It can cost about [latex]0.5\%[/latex] to [latex]1\%[/latex] of the amount you are financing.
• Prepaid taxes. You will need to pay about [latex]6[/latex] months of taxes at the time of purchase.
• The credit report fee. This is a fee for checking your credit. You might pay [latex]$25[/latex] or more for this.
• The origination fee. This is the price the mortgage company charges you to cover the costs of creating the mortgage. This could be [latex]0.5\%[/latex] to [latex]1\%[/latex] (or more) of the amount you are borrowing.
• The application fee. This is just a processing fee and could come to several hundred dollars.
• The underwriting fee. This covers the cost of verifying your financial qualifications. It could be a flat fee, or some small percentage of the amount financed. Such as [latex]0.5\%[/latex] to [latex]1\%[/latex].
• Agent/Attorney fees. If you use a real estate agent or an attorney, you will have to pay them.
• State or local fees. This may include a filing fee charged by the county or municipality in which you reside.

That’s a long list, and it is not even complete. When buying, be prepared to see these costs. It can be surprising. But in the end, you will have equity in the home, which means when you sell your home, you will get some of your money back.