Renting or Buying your next home. Which is your best option?

Have you crunched all the numbers?

The biggest mistake future homebuyers make is comparing a month’s rent to a month’s mortgage payment. First, there are additional costs and expenses that homeowners incur that must be added to the monthly mortgage payment. To make a fair comparison you need to also include the following: property taxes, property insurance, homeowner’s association fees and maintenance.

Next, you should keep in mind that home mortgage interest and real estate taxes on your home are deductible on your income taxes if you itemize. Hence, the availability of these tax deductions should also be taken into account when you are considering whether to buy or rent.

Forecast on home prices

According to Clear Capital, a provider of real estate data and analysis, home prices nationally rose 4% in 2015, following a 6.4% hike in 2014. This slowdown is not an indication of a problem but rather a sign of more normal real estate market conditions. Distress sales will no longer be playing an outsized role, new construction is returning to more traditional levels, and prices rise at more normal rates consistent with a more balanced market.

The housing sales and price forecasts for 2016 for both Illinois and Chicago are still positive but within smaller ranges month-to-month than those experienced in 2015.

Current trend for rentals

More than 85% of U.S. markets have rents that exceed 30% of the income of renting households. Because of this, it is more affordable to buy in more than three-quarters of the U.S.

With mortgage rates around 4% and the positive outlook on real estate prices, 2016 may be the time for you to purchase instead of rent if you are in a position to qualify for a mortgage.

Making the Case for Renting

One of the first questions new home buyers face is whether buying or renting is best. Some people will tell you that it’s clear cut: your rent money is going down the drain, while you can pay close to the same for a house payment and actually make your money go toward something (equity or value in the home). And while cost of renting vs. buying is a definite consideration, you should consider other factors as well. Let’s look at some instances where renting makes sense.

First …

You should consider whether you can afford the costs of homeownership. Your monthly loan payment has additional costs than just the loan: You also have to pay for home insurance, mortgage insurance in some cases, and taxes. All of these make up your monthly payment. You also need money to put toward a down payment. And unlike the majority of rentals, when you own a home, you are responsible for maintenance and repairs.

River North’s New Jones Chicago Apartments

Second…

You should consider your situation. Renting might make sense in the following cases:

  • You are moving to a new city, and you are not sure what neighborhood or area of town you want to live in. You may rent to get a feel for the city and then purchase a home after you are more familiar with the city.
  • If mortgage interest rates are high, you may not be able to afford a home, or the homes you do qualify for may not be to your liking. In this case, you may consider waiting until the rates are more favorable.
  • You are in a transition — looking for a new job, getting married, or getting a divorce, for instance — and you don’t want to commit to a home. If you will only be living in the home for a short while, you won’t recoup the costs of buying and then selling that home. Financially, renting might be the better option.
  • You are looking for a home in a seller’s market. In a seller’s market, homes are quickly sold, driving home prices up. In recent years, the home market had been booming, interest rates were low, and home prices were soaring. To purchase a home in this type of market, you need to make an offer quickly, and you don’t have a lot of room for price negotiation (if there are other buyers wanting the same house) or other considerations such as asking the seller to pay parts of the closing costs. You may want to wait for more favorable market conditions. Markets usually go in cycles, so what goes up eventually comes down. Currently, the real estate market gives the edge to buyers; there are a lot of homes on the market, and they are not selling very quickly. In this case, you have more room for negotiation.
  • Your income is not steady, you don’t have money for a down payment, or you have a bad credit rating. In these cases, you may find it hard to get a loan, or if you get a loan, you may have to pay a higher rate. You may want to put off getting a home until your financial situation is more stable.

So, renting does offer pros (and cons). And when you are ready to take the plunge and buy a home, you’ll find many benefits (and some drawbacks) with that choice as well. The best option for you today may be a completely different one next year or the year after. So look at your lifestyle, your resources, and your long-term financial strategies, talk to a real estate professional that you trust and most like, the answer will be revealed.

Good luck and happy home hunting!


For seasoned, Chicago market, representation in your next residential real estate rental, purchase or sale, contact me at 317–258–1660 or tom.krengel@bairdwarner.com, and I will put our 160 years of experience to work for you!

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