Should I Rent or Buy a Home?
Weighing the Pros and Cons at Any Age
The decision between owning or renting a home isn’t always as straightforward as it may seem. While buying a home usually is considered a good investment, renting can also have financial benefits.
Determining what’s right for you will depend on many factors, including your life stage, costs involved, and future plans. Here are some key points to weigh as you study the choices that make the most financial sense for you.
How to Know if You’re Ready to Buy
What are some benefits of buying?
Buying a home traditionally has been a way for many families to build wealth, while also giving them a place to live. Monthly mortgage payments are a type of forced savings, enabling equity in the home to gradually increase each month.
Your equity will also rise as the value of your home goes up. Whether your house appreciates in value over time and by how much depends largely on the local market but houses nationally have increased in price by an average of 5.3% annually since 1992, according to economic research firm CEIC Data.1
And as you build equity in your house, you can borrow against it through a home equity loan or a revolving home equity line of credit. That can be an invaluable resource during an emergency.
Homeownership, of course, comes with many costs. But federal tax breaks can reduce those costs for homeowners who file an itemized return. Among the tax breaks you can expect:
- Mortgage interest. Individuals and married joint filers can deduct interest paid on up to $750,000 of mortgage debt for buying, building, or substantially improving a primary residence.2
- Discount points. Many homeowners pay points to get a lower interest rate from the mortgage lender. Points, which are prepaid interest, are deductible as home mortgage interest.
- Property taxes. You can deduct the property taxes you pay each year – combined with either state and local income tax or sales tax – for a maximum deduction of $10,000.
- Capital gains. You don’t have to pay taxes on up to $250,000 ($500,000 for married joint filers) in gains on the sale of the house if you owned and lived in the home for two of the last five years.
- Mortgage insurance premium. If you must purchase private mortgage insurance because your down payment was less than 20%, you can deduct some or all of your premiums if your adjusted gross income doesn’t exceed $109,000 for single and joint filers.
What are some advantages of renting?
The freedom to relocate for a new job, to find a more affordable place, or to gain a change of scenery are some of the key benefits of renting vs. buying. Another consideration? Renters don’t have the worry about staying in a home long enough to recoup the costs of buying, owning, and selling it. For homeowners, a common benchmark is that it takes five to seven years to break even.3
Renters also don’t bear the ongoing expense or hassle of maintaining a property. That’s the landlord’s responsibility. You also won’t need to worry about paying property taxes or for homeowners insurance premiums.
And while renting is sometimes viewed as “throwing away money” because tenants don’t build wealth, that assumption may not be necessarily true. Researchers at Florida Atlantic University found that renters can build wealth just as fast as homeowners – or even faster in certain markets.4 For this to work, though, renters must invest the money they would otherwise have spent on home ownership, such as the down payment, insurance, taxes and upkeep. Renters who aren’t disciplined investors, the researchers say, would be better off buying a home.
How to Know If You Should Rent or Own a Home in Retirement
What are the perks of becoming a renter in retirement?
Homeownership remains high among those in or near retirement, although an increasing number of older consumers are choosing to rent. The number of renters age 60 and older grew by 32% over the decade ending in 2019, while homeownership among this age category grew by only 23%, according to an analysis of Census data by RentCafe, a national apartment search service. 5
Many empty nesters find that renting allows them to downsize and gain flexibility. They can move multiple times – sometimes to be nearer to children and grandchildren; other times to be closer to entertainment and cultural sites.
Renting offers retirees some unique financial benefits. For example:
- You can move to a locale with a lower cost of living or one that’s more tax friendly for retirees. Some states, for instance, shelter Social Security benefits or a certain amount of retirement income from taxation.
- And renting can help your nest egg last in retirement. When you sell your house, you can exclude up to $250,000 in profits ($500,000 for joint filers) from taxes. The proceeds from the sale can be invested to help generate income in retirement.
- What is the appeal of homeownership in retirement?
About 80% of people age 65 and older currently are homeowners,6 and retirees have plenty of good reasons to remain so. They may live near family, friends, and other important professional and social connections. And it’s often emotionally difficult for people to abandon a house where they raised a family.
Indeed, many retirees want to age in place, and they often can do so by remodeling or retrofitting their house to be more age friendly.
Housing costs, too, can drop significantly in retirement if your mortgage is paid off or nearly so. Being a homeowner also means you don’t have to worry about a landlord raising the rent.
And when in a financial pinch, you can tap the equity in your house that’s been building for years. “Tappable equity,” or the amount homeowners with mortgages can borrower while maintaining 20% equity in their homes, reached a record $6.5 trillion in 2020, according to Black Knight, a mortgage data provider.7 You can borrow through a home equity loan, home equity line of credit or by refinancing.
Or, homeowners age 62 and older may qualify for a reverse mortgage. This loan doesn’t have to be repaid as long as the borrower remains in the house and keeps up with the taxes, insurance and maintenance.
Lastly, a house is an appreciating asset, and for many homeowners, one they want to pass on to the next generation.
Your Next Steps
As you can see, many factors come into play when deciding whether to be a renter or homeowner. So, it’s important not to rush the decision. Working together with a insurance agent* or financial advisor can help you find the right move for you.
Are you ready for retirement? Check out these resources for important advice and information.
*In Washington and Oregon, insurance agent should be replaced with insurance representative.
The information provided is not intended to be tax advice. Consult your tax advisor to determine the tax benefits for your business.
1 United States House Prices Growth, CEIC Data, September 2020.
2 Home Mortgage Interest Deduction, Publication 936, IRS, 2019.
3 When Renting is Smarter Than Buying, Kiplinger.com, November 2019.
4 Index: Even in a Pandemic, Demand for Homes Remains Robust, Florida Atlantic University College of Business, Dec. 7, 2020.
5 The Decade in Housing Trends: High Earning Renters, High-End Apartments and Thriving Construction, RentCafe, Dec. 16, 2019.
6 Consumer Expenditure Survey, Bureau of Labor Statistics, 2019.
7 Tappable Equity, Refi Incentive Hit Record Highs While Cash-Outs Fall, Black Knight, July 2020.