12/06/2024
Rent Versus Own: Which Wins?
Building equity is the key
The key financial difference between owning and renting? It's equity.
Equity is the difference between what you owe on your mortgage and what your home is worth. If your home is worth $400,000 and you owe $150,000 on your mortgage, you've built $250,000 in equity.
This matters when you're ready to sell. The more equity you have, the more money you'll walk away with after the sale.
You build equity in two ways
As you pay down your mortgage, your equity will grow. But your equity will also grow if your home's value increases. This is the fun way to build equity: It happens without you doing anything.
Keep in mind that there is no guarantee that your home's value will increase. But if you own your home for seven or more years, the odds are in your favor that it will. Home values have almost always grown over the years, with only a few blips, such as during the Great Recession from late 2007 to mid-2009.
However, when you rent an apartment, you don't build equity since you don't own anything. When you pay your rent each month, you are only giving money to your landlord.
When you own a home and build equity, you can also borrow against it in the form of a home equity loan. You can use the borrowed money however you like, including funding home improvement projects, paying down high-interest-rate credit card debt or financing your child's college education.
Tax benefits
Owning a home also comes with tax benefits. You may qualify to deduct all or part of the interest you pay on your mortgage from each year's income taxes. This may reduce your yearly tax burden.
You also may qualify to deduct all or part of the interest you pay on any home equity loan you take out. To qualify for this tax deduction, you must use the home equity loan proceeds to fund home improvements that increase the value of your home.
Again, you won't get these potential tax benefits when renting. Renting an apartment or home does not come with tax advantages.
There are times when renting makes sense
If you plan on living in an area for a limited time, renting is often the smarter decision. If you are living somewhere on a short-term basis, you might not have enough time to build up equity.
Some people also prefer the renting lifestyle. When something breaks in your apartment, you can call your landlord to fix it. If it happens in a home you own, you must pay for and make the repair yourself or hire someone to do it for you. When you rent an apartment, you also generally won't have to worry about mowing the lawn, raking leaves, shoveling snow or completing other exterior maintenance tasks.
The rent-versus-own decision often comes down to your wants. If you're looking for the chance to build equity and take advantage of potentially lucrative tax breaks, owning a home is usually the right choice. If you're looking for convenience and the ability to move quickly, then renting may be the right choice.
