Shelter is one of the most basic of necessities. In general, people can either rent, buy or rent to own a place to live. Home ownership is often idealized, but it is not without its own pros and cons. Because financial situations vary from one person to the next, owning a home may be ideal for some while renting may be the best situation for others.
Pro’s and Con’s of Home Ownership vs Renting
Credit is the Key
Maybe one of the most influential things that can impact your decision to buy or rent is your credit history. In a perfect world, applying for an apartment lease or renting a home from a private owner shouldn’t necessarily require a good credit score, although that is changing these days as more and more landlords are putting a greater weight on a potential renters credit situation. Landlords check credit histories, but few place emphasis on actual credit scores as they are mainly checking to ensure that there is no history of evictions, breach of contracts or credit issues that could result in your not being able to fulfill your rental obligations (collections etc.). Buying on the other hand involves a complete check of your credit and lenders tend to favor applicants with credit scores of 650 and above.
Cost of Home Ownership
The costs of home ownership vs. renting is also a determining factor in impacting the decision to purchase or rent. With renting, landlords will charge a fee to review applications and check your credit report. They also charge security deposits equivalent to one month’s rent (you usually need to have 1st and last rents). These costs are minor in comparison to buying a home. Mortgage lenders can also charge application and credit fees but not all do. In addition, mortgage loans involve closing costs (about 3 to 5 percent of the loan balance) and down payments between 5 and 20 percent of the home price.
Long-Term Benefits of Home Ownership
The long-term benefits of buying will always outweigh the benefits of renting. Buying a home involves a mortgage loan that you gradually pay down with each monthly payment. In conjunction with paying down your mortgage, properties should increase in value over time (they will increase as long as you have done your research and purchased in a good area). As you build equity (difference between the mortgage balance and the home’s worth), ownership provides the option of tapping into your equity and borrowing cash to invest, renovate to add more value to your home or help put your kids through University. When you sell the house, you can walk away from the deal with cash in your pocket. When you rent, however, you pay money to your landlord each month which he/she uses to pay down their property and build equity in their property. If you rent for many years, your landlord will love you but what have you done for yourself? Nothing sine you haven’t built any equity and will have nothing more than a handshake from your landlord when you decide to move on.
The elephant in the room just might be this point. The biggest complaint we hear from people about home ownership is that there is much more responsibility that comes with owning vs. renting. When you buy or rent to own a house, you are solely responsible for the maintenance and upkeep of the property. Be prepared to deal with plumbing and electrical issues as well as any other damage that can occur inside or outside of the home. On the flip side, maintaining your home over the long time will contribute to the value of the home which will net you more equity. As a renter, there is no responsibility, this is true but there is also NO equity. Renters get the landlord to deal with all repairs and issues with the house. Seems easier but not all landlords are quick to move to repair issues as it means that they are out of pocket for the repairds and at the end of the day, the impacts their bottom line – so even though it is THEIR responsibility, they don’t always act on it in a timely fashion.
This one is simple. Home ownership allows you to build equity plain and simple. As the owner, you get to enjoy the fruits of your hard labour (paying for the property) because you are constantly paying your mortgage down and you also get to enjoy the benefits of any improvements that you may have made on the home. These are two ways to build equity but don’t discount the rewards of doing your homework and finding a property that appreciates in value as you get to enjoy this as well. Just remember, equity is the portion of the property that you actually own. As a renter you do not build equity for you, only for your landlords. As above, at the end of the day, the renter owns nothing when they decide to move on from one rental to another.
Enjoy Some Stability
Tired of packing and unpacking when your lease is up? How about those landlords that tell you one thing and then ask you to leave your rental because they are selling or want to move back in? Want some stability? Don’t we all. Home ownership provides plenty of stability in your life. Sure it isn’t easy to get up and move on (you have to sell the property – BUT – think of the equity you earn) like a rental (renting provides freedom and more flexibility) but we have heard from many renters who are sick and tired of moving from one place to another. Set down some roots, take off your shoes and stay awhile. That is what home ownership offers you.
Finances are usually a major determining factor that you face when you are deciding between home ownership and renting. With home ownership, you have to secure a mortgage and get house insurance. No biggie right? Wrong. Unfortunately, the housing market in the US and our tighter lending regulations here in Canada have made it harder and harder for people to get approved for their own mortgage. Gone are the days of $0 down financing. So what do lenders look for? They want to see your finances, ensure you have a job (as well as a track record in that job) and will definitely review your credit score. By using a combination of these things, you will either get approved or turned down for a mortgage. Typically, if you do get approved, 5% down is required in order to purchase. Do you have it available? In other cases, lenders will ask for 10-15% down to mitigate their risk of approving you (afterall, the more you put down, the more you have to lose in their eye). If you are not in a position to put 5% down but shudder at the thought of giving some landlord you hard earned money, check out rent to own. You can get into home ownership with as little as 2-3% down and still get to enjoy all of the benefits listed here, afterall, you are still the owner even if you are not on title just yet. On the flipside, renting does not require you to get approved for financing (although many landlords will check your employment situation and credit report) before approving your application to rent. Don’t be fooled though, you are still paying for many of the expenses that any home owner would have to pay as a renter. Property taxes, insurance? Sure, what do you think your rental payment covers. No landlord in his right mind is going to cover the expenses on a property himself.
Ok, so now you have decided that home ownership is the way to go, it is time to figure out what is involved in the process? What steps do you have to take to get “there”…
Here is a simple checklist that you can use on your journey to home ownership:
- Determine whether you want to rent or buy (or rent to own if you cant qualify for a mortgage today)
- Decide what kind of home you want (townhouse, semi, detached), what budget you can afford and what area you want to live in (what is important to you – parks? schools? transit? shopping?)
- Get pre-qualified with a reputable and trusted mortgage broker
- Find a reputable and knowledgeable realtor to help you with the house search
- Once you have found your “dream home”, apply for the mortgage.
- Make the offer
- If your offer is accepted, finalize your financing and secure a professional home inspection. Do whatever is necessary to ensure that you are present for the home inspection (take a holiday day if needed). Ask lots of questions and be sure that you are comfortable with the property at the end of the inspection
- Waive conditions and firm up the offer
- Call the moving trucks or rent a van, pack the boxes and move in!
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