By Jeremy Bowman, The Motley Fool
House Ownership vs. Renting - The oldest real estate debate. Here's why the first option is desirable.
Why is owning a home better?
When it comes to housing, there's no bigger decision than whether to rent or own. The option you choose can affect your lifestyle, finances, freedom, and even your sense of well-being.
If you've considered buying a home, you've likely weighed the pros and cons and done some research on how owning compares to renting. While there are some advantages to renting, there are number of reasons why owning a home is a probably a better idea in the long run.
1. It's an investment
Probably, the biggest advantage of owning a home is that it doubles as an investment. And if you do own your home, there's a good chance that it's your biggest investment.
According to the Case-Shiller Home Price Index, home prices have increased on average by 4.3% over the last 35 years. That may not sound like much, but that means the average home price in the country has more than quadrupled during that time, which includes the crash during the 2008 financial crisis.
Owning a home is also a relatively low-risk investment. The financial crisis was the only time in modern history there was a sustained decline in home prices nationally.
2. It's easily subsidized
If you want to invest in stocks, crypto, or something similar, you're going to need to put up cash up front. While you can use margin to buy stocks, you must have money invested to borrow against it, and if your stocks fall, you're at risk of margin call, meaning you have to liquidate your holdings.
When it comes to investing in a home, much of the heavy lifting is done for you. While a 20% down payment might seem typical, the average homebuyer in the U.S. puts down just 6%. In other words, the lender essentially buys the house for you, provided that you pay it back over time.
In this arrangement, a mortgage is a valuable financial instrument for a homebuyer, who gets to enjoy the home and benefit from the appreciation in value, even as the bank puts up the money for it.
Often, your mortgage payment is comparable to what you'd be paying in rent for a similar place.
3. It's a great hedge on inflation
With consumer prices surging these days, homeowners are sitting pretty versus renters. Average rents jumped 14% nationally last year and rose even faster in cities like Miami, New York, and Austin, Texas. With inflation still running hot, rents will likely jump again this year.
While some rent-control or rent-stabilization laws can protect tenants from double-digit rent hikes, often they're at the mercy of the market -- and moving to avoid paying higher rent is a huge inconvenience.
On the other hand, homeowners have their mortgage payments locked in, and inflation actually works to their advantage as it raises the value of their homes while their payments remain the same.
4. You can borrow money for 30 years
Roughly 90% of homeowners use the 30-year fixed mortgage, and it's easy to see why. Not only does the 30-year fixed make your mortgage payments lower than most other options, but it also takes advantage of a financial market that's geared toward supporting homeowners.
In fact, the 30-year mortgage exists as part of a New Deal program to make housing more affordable and support homeowners.
In other words, it's a gift, and you're unlikely to get a similar financing package for that kind of timeline at that low of a rate for anything else.
5. You can borrow against the value of your home
Another perk of owning your home is that you can borrow against its value. If your home value has increased or you own enough equity -- generally more than 20% -- you should be able to borrow through a home equity loan or line of credit.
While you could use that money for a home improvement project, you don't have to. It could go to starting a business, paying for a kid to go to college, or taking care of an unexpected medical bill.
Having an asset you can borrow against gives you a level of flexibility that renting a home can't.
6. There are several ways you can monetize it
The main reason to own a home is to live in it, but there are also more ways than ever to monetize it nowadays. If local rules allow, you can rent it out on a short-term rental site like Airbnb when you're not there. You could also just rent out a spare room to help pay the mortgage.
There are even sites that help you rent out storage spaces like garages, and if you're entrepreneurial, you could consider starting a home-based business like a daycare, which is in high demand these days.
Of course, if you choose not to live in your home, you could still make money by renting it. If you do, you're likely to recoup the carrying costs, and you could even make a profit on the property.
7. It will help your credit score
If you already own your home, you may not need to worry about your credit score. But a cruel irony about paying your rent is that even though it's your biggest expense, paying it does nothing to build your credit score, at least not without reporting it to the credit agencies.
Paying a mortgage regularly, however, will help build your credit score. That makes you more creditworthy, which can help if you're interested in borrowing money to buy a second home or do something like start a business.
It never hurts to raise your credit score.
8. You can lower your monthly payments
If you're a renter, the chances of your monthly rent ever going down are slim. Your landlord might not choose to raise the rent every year, but it will likely go up over time.
Not only are mortgage payments fixed, but you might even have an opportunity to lower them if interest rates drop. For instance, millions of Americans refinanced their mortgages in 2020 and 2021 to take advantage of lower rates, trimming their mortgage payments by hundreds of dollars.
While not every homeowner gets that kind of opportunity, owning a home both acts as a hedge on higher interest rates and allows you to take advantage of falling ones, making it valuable to adapt to changing financial markets.
9. You have full control over your living space
Finances aren't the only consideration when deciding whether to rent or own. There are also quality-of-life issues, and one of them is the ability to do what you want with your living space.
If you're a renter, you have to ask permission to do things like paint a room a different color, and if you want to make upgrades like adding a dishwasher, your landlord may not agree to it. Alternatively, they may ask you to help pay for the upgrades you request, which leaves you paying to improve their asset.
As a homeowner, you can do what you want with your space, provided you have the wherewithal to pay for it, and you can benefit financially from the improvements.
10. You'll feel invested in your community
Another advantage of being a homeowner is that it may help you feel more invested in and connected to your community.
As a homeowner, you might find that you feel a sense of pride in your community and an incentive to be a good neighbor, helping out those around you, supporting local businesses, and participating in activities like neighborhood clean-ups. You might also develop an interest in local politics to understand more about the issues people are concerned about in your area.
You don't have to own a home to do any of these things, but the psychology of an owner is different than a renter, and owning a home could strengthen your relationship with the rest of your neighborhood.
What's right for you?
There are a number of advantages to owning a home, but that doesn't always mean it's right for you. If you are thinking about buying a home, you'll want to be sure you have enough saved up for a down payment and an emergency fund and that you're committed to owning the home for at least a few years.
Read more: How to Buy a House at Auction
If you're most interested in flexibility and don't want the responsibilities that come with homeownership, renting may be better for you right now. Still, you should keep the advantages of owning in mind as there may be a time later in life when it makes sense for you to buy a home.
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