You hear a lot about homeownership as the key building block of the American dream, especially for Veterans who sacrificed so much. You hear a lot about it because it’s true on so many levels. Sure, if you buy the right home in the right location, you’ll gain equity – and depending on how long you keep the house, you can easily double or triple your investment.
But the smaller, day-to-day details also contribute to the dream. For example, putting your stamp on your living spaces, whether you want to paint the kitchen pumpkin or tear out the lawn and grow a tumbling English flower garden in the backyard. And since you’re not living under the watchful eye of a landlord, you can now get a furry friend – or two or three. So, yes, homeownership feels good in myriad ways.
Still, owning a home comes with a set of challenges that, as a potential buyer, you should acknowledge before taking the plunge. Of all the purchases you’ll make in a lifetime, a home will likely be the most expensive, so as an informed buyer, there are vital factors to consider before you decide whether to purchase or rent.
Let’s take a look at the advantages and disadvantages of both renting and buying.
Mortgage and other financial considerations when buying
Among the most crucial factors when deciding whether to buy or rent is your financial makeup. Because even if you choose to use your VA Home Loan Benefit, you’ll be wrangling a mortgage, home insurance, and various closing costs to satisfy appraisers, real estate agents, attorneys, title companies, and assorted third parties involved. The good news, though, is that with a VA Home Loan, you won’t have to worry about a down payment, private mortgage insurance, and you’ll get lower interest rates. And, you should know that you could ask the seller to help cover some of the closing costs – but don’t assume.
Beyond the mortgage
Congratulations. You signed the final loan documents, and you now have the keys to your very own home. Soon, you’ll be making that monthly loan payment, but there are other financial considerations to keep in mind now that you’re a homeowner. Here are a few:
Property Taxes. As a homeowner, you’re now responsible for paying your share of property taxes based on the assessed value of your home. You may pay them monthly if they’re included in your mortgage payment, quarterly, or annually. The amount depends on where you live, and it changes dramatically from state to state and within each state. What property taxes fund, though, are the same everywhere.
- Public schools: Building and maintaining schools and paying teacher salaries.
- Safety: Property taxes help fund salaries and equipment for police, firefighters, EMTs, and other public safety workers. They also go toward legal payouts for misconduct and personal injury lawsuits.
- Spaces: Maintaining recreational sites, including public parks, jogging and bike paths, nature preserves, and ball fields.
- Streets: Property taxes contribute significantly to the construction and maintenance of local roads.
- Sanitation: Street cleaning, sewer, and storm-water management.
Maintenance and repairs
So, as a renter, you might not be building financial equity, but when the heater conks out in the middle of winter, you have the satisfaction of knowing that the repair or replacement costs are coming out of your landlord’s pockets, not yours. But as a homeowner, the responsibility lands squarely in your corner. The same applies to the basic upkeep of the property, so it’s wise to set aside a household emergency fund.
Remember when you lived in the apartment and the owner covered water, trash, sewer, and cable television? Well, you’re a homeowner, so those days are gone. Now, it’s up to you to budget for utilities, and don’t forget to add the cost of internet.
Benefits of homeownership
That previous list might look daunting, but you knew there would also be financial perks to owning your home. Here are just a few:
There are limitations, but you can deduct your mortgage interest. If, for example, you bought your house before December 15, 2017, you could deduct interest payments up to $1 million in loans that you used for purchasing a home, building a home, home improvement, or buying a second home.
But the laws changed temporarily, and if you bought after December 15, 2017, the amount you can claim was reduced to $750,000 until 2025, when the $1 million limit returns.
You also can deduct your state, local, and property taxes up to a combined $10,000, which significantly reduces the money you owe on your federal income taxes, thus allowing you to keep more of your cash.
Use any part of your house as a home office on an exclusive basis, and you might be able to deduct some of the costs, including general depreciation, repair costs, and even your homeowner’s insurance.
Note that you should always speak with a tax professional to find out exactly which deductions you are allowed.
You’re building equity
Equity. That’s the Big Kahuna. The top gun. The goal of homeownership.
Typically, equity is defined as the difference between what you owe on your mortgage and what your property is currently worth. For example, if you owe $200,000 on your loan and your home is worth $250,000, you have $50,000 of equity in your home. Naturally, your equity will increase along with the value of your home, which is one of the reasons you’ll find that real estate agents will drum “location, location, location” into your head as you’re house hunting. Your dream house in an inferior neighborhood probably won’t increase in value as quickly as a more mediocre home in a terrific neighborhood with excellent schools and a convenient commute.
Think of the equity you build as hassle-free or passive savings. You don’t have to do anything except maintain your property to contribute to your family’s future as your equity mounts.
If you want to give that equity a nudge, you could always arrange to pay more than your mortgage payment each month to add to your principal balance, or you could make a series of home improvements to increase its value. Remember: Increase the home’s value equals increased equity.
And as a bonus, the more equity you gain, the more money you could borrow against it if you had to.
Your home’s value appreciates
Although you can, and often should, contribute to your home’s value by upgrading and renovating whenever necessary, even if you didn’t, it’s likely that your property would appreciate on its own with basic maintenance and the passage of time.
So, barring an economic meltdown and an inability to pay your mortgage each month, your house should offer an ideal return on your investment.
Should I rent?
If you’re an active-duty servicemember, you’re aware that the US military makes up a massive and diverse force, so one-size-fits-all doesn’t work for everyone, especially when discussing housing.
To rent or purchase is easily one of the top questions military families have to consider many times during an active-duty career. To further complicate matters are the various sets of PCS orders military families have to contend with when deciding on their living arrangements.
As you see, owning a home comes with plenty of advantages, such as deductions and equity, but we’ve detailed disadvantages too, including upfront costs and home maintenance.
And when it comes to renting, there are some financial considerations you need to keep in mind too. Here are examples:
Few surprises with stable rent
If you signed a lease rather than paying month-to-month, you’re going to pay a fixed monthly rent for the duration of the lease. If the terms include utilities, then those extra-long hot showers won’t impact your budget. And, hey, go ahead and sleep with the air conditioner on if that makes you comfortable.
Maintenance? Not your problem.
It might be inconvenient if the dishwasher stops working, but the repair or replacement isn’t coming out of your pockets.
Move-in costs don’t require a loan
To get into a rental requires far less money than buying a house, obviously. Typically, you’ll pay the first and last month’s rent, a security deposit, and, if you have pets, a non-refundable fee.
Lower monthly expenses — usually
Unless you’re renting a large home with a pool, utilities are usually lower in a rented property, especially if the owner subsidizes part (or all) of the monthly fees. Often, that’s the case with apartment rentals. In addition, HOA fees and taxes are either paid by the property owner or folded into the rent. Either way, you don’t have to deal with them outright. And you’ll save significantly on renters’ insurance, which is a fraction of homeowners’ insurance.
How much of my income should I spend on rent?
Typically, you shouldn’t spend more than 30 percent of your gross income on rent. Ideally, 20 percent and 25 percent if you must.
If you’re not sure which is best for your living situation, you’ll find several rent versus buy calculators online to give you an idea of what to expect from each scenario.
But remember, although there are long-term financial considerations for buying and renting your home, money isn’t the only factor to note. Consider both your lifestyle and your future. For example, do you need a place where your family can grow? How long do you plan to stay in the area?
Purchasing a home and renting come with pros and cons, and you must become familiar with them before making such a crucial decision.
If you need additional help to figure out whether it’s more advantageous to rent or buy, get guidance from a real estate agent or lender who deals with military families. Agents and mortgage lenders track local housing trends and have expert knowledge on how buyer and rental markets typically behave. At Aligned Mortgage, our loan officers are always available to help.