Whenever you think about mortgages, you probably imagine that you need a seriously exceptional credit…
There are two main ways of putting a roof over your head: renting your home or buying it. Both have their upsides and downsides, and both can work well for different situations. What do you need to know before deciding which route to take?
1) Down Payment Amount
Both renting and buying involve paying out money upfront. When you rent, you’ll usually need to provide the first and last months’ rental payments in advance, along with a security deposit to cover potential damage. If all goes well, you’ll get this deposit back at the end of the lease, but any number of accidents or other issues could see you lose the cash.
The down payment you’ll need to buy a home is likely to be much larger. Typically, you’ll need to provide 10% or more of your home’s value to be approved for a mortgage, although certain schemes such as FHA loans can reduce this amount considerably if you qualify.
And while a large down payment can be difficult to find, the benefit is that the more you pay in advance, the lower your monthly mortgage payments will be and the less interest you’ll pay overall.
2) Ease of Budgeting
When you sign a rental lease, you’ll know exactly how much you’ll pay every month for the duration of the contract. However, there’s nothing to stop your landlord hiking your rent significantly when the time comes to renew.
In contrast, with a mortgage, you have much more control. You can fix your repayments for five years or even longer, so you know exactly where you’ll stand with your budgeting. You have the option of refinancing for a better deal.
3) Making Your Home Your Own
With a rented property, you’ll have major restrictions on customizing it to your preferences. You won’t be able to make any large changes without the owner’s approval and even redecorating or minor DIY projects could be enough to forfeit your deposit if the landlord decides to be unreasonable. When you own your home you can do whatever you want to make it more comfortable, and you’ll also benefit from any increase in value that your improvements create.
4) Maintenance Costs
Renters aren’t usually responsible for the general ongoing maintenance of the property. No-fault repairs are usually down to the landlord, although it can sometimes be difficult to get issues attended to promptly.
When you own your home you’re responsible for all repair and maintenance costs, and the expense can mount up alarmingly. The upside is that you’re also responsible for arranging for any necessary work to be done, and you can schedule it to your own timetable for convenience.
5) Stability vs. Flexibility
When you rent a home, you’re freer to move around once your lease is over. You don’t need to wait until the owner has found a new occupant if you want a change of location. The flip side is that the landlord can decide to stop renting you the property at short notice, so long as the lease terms aren’t broken. When you rent, you can easily be forced into an unwanted move.
When you own your home you have stability and can stay as long as you want, so long as you keep to your mortgage repayments. The downside is that if you decide to move, you’ll probably have to wait for a willing buyer to come along before you can start afresh somewhere else.
6) Investing for the Future
With a mortgage, every payment goes toward lowering your debt and ultimately building an investment for your future. When you rent, your payments keep you in your home for another month but build no lasting value. This cash drain can be a difficult treadmill to leave behind if it prevents you from saving up for a mortgage down payment.
Renting and buying both have their advantages and disadvantages and are useful at different stages in life. However, buying a home is a huge step to take, and it’s important to explore all the financial implications before making your decision.