TEACHING YOUR ADULT CHILDREN THE VALUE OF BUYING VS. RENTING
Your child has flown the coop but still has questions. Should your child buy or rent a home?
It’s a common debate, and one parents can help their children decide. While renting has its benefits, it’s often better to buy. Today there are more loan programs than ever, making it easy for first-time homebuyers to jump into real estate investing and making one of the largest and best investments of their life.
But how do you teach your child the value of buying vs. renting?
Here’s how.
Buying vs. Renting – What’s Better?
Your child will likely ask you – which is better, buying vs. renting? Renting seems convenient. It’s often cheaper and you don’t have to worry about any maintenance. But then there’s the fact that you don’t own anything. When you reach the end of your lease, you pick up your belongings and walk away with nothing.
When you buy, you have equity in the home. Even if your child buys a home with a small down payment, every payment he/she makes builds equity in the home. It’s like an automatic savings account since a portion of the payment pays down the principal balance.
If your child sells the house, he/she keeps the difference between the sales price and the current mortgage balance, minus closing costs.
There are definite benefits of buying vs. renting, but let’s look at the pros and cons of each so you can help your child decide what’s right for him/her.
The Pros of Buying
• You build equity in the home. You can use the equity however you want. Once you owe less than 80% of the home’s value, you can even tap into the equity if necessary.
• You may be able to write off the interest you pay on the mortgage if you itemize your deductions on your taxes.
• You can do what you want with the home and the property within local guidelines. You don’t have to get approval from a landlord.
• You may have a greater sense of community since you own the place and are more likely to get involved.
The Cons of Buying
• You may need a down payment and to cover closing costs. It can be hard to come up with the large amount of money needed when you don’t have a house to sell.
• It’s harder to move around since you own the home. You’d either have to rent it out and earn monthly income or sell it, but both processes are labor-intensive.
• There’s no guarantee the home value will increase.
The Pros of Renting
• You aren’t responsible for any maintenance or repairs. If something goes wrong, you call your landlord and he/she must fix it.
• You don’t have to come up with a large down payment or money for closing costs. You may need a security deposit, though.
• You can move freely since you don’t have to worry about selling a property, but you may have to wait until your lease expires
The Cons of Renting
• You don’t have anything to show for renting when you move. You don’t build equity in it or have anything to sell.
• You can’t customize the home like you would if you owned it. Landlords typically don’t allow many modifications.
• Renting doesn’t help you build credit so you can qualify for a mortgage in the future.
How to Help your Child Decide
If your child is deciding between renting and buying, help him/her with the following questions.
1. Do you plan to stay in the property for a while?
If your child’s plans to stay in the area last for more than a year or so, buying can be a better choice. They can put down roots, build equity, and have a place they can call their own. If your child is more of a free spirit and likes to move a lot, though, renting may be the better option.
2. Do you want a place to invest money?
Even if your child is new to adulthood, everyone should invest. Putting money into a home can be a solid investment, especially if they stay for a while. Between home appreciation and paying the principal balance down, your child can earn a great return on his/her investment.
3. Does your child want a stable monthly cost?
Rents can increase annually and there’s never a guarantee the landlord will renew the lease. If your child is looking for something more stable and/or predictable, a mortgage is a better option. If your child qualifies for a fixed-rate loan, he/she doesn’t have to worry about increasing housing costs or the risk of having to find somewhere to live often.
4. Does your child have the credit to buy a house?
Fortunately, today first-time homebuyers don’t need perfect credit. You can get an FHA loan with a credit score as low as 580 and with as little as 3.5% down on the home. FHA loans also allow parents or other family members to gift funds to the buyer to help with the down payment and/or closing costs.
Final Thoughts
If your child is ready to fly the coop and find a place of his/her own, discuss the benefits of buying vs. renting. While renting may seem cheaper and more convenient, the benefits of buying far outweigh it.
Help your child see the benefits of buying a home even when it seems overwhelming. The return on his/her investment, the freedom it provides in regards to the home, and the financial peace it provides as the house appreciates can’t be replicated by renting.
Contact us for a no-obligation conversation. Valley Mortgage is the largest independent mortgage lender in North Dakota and northern Minnesota. We’ve been helping folks like you for more than 38 years. If you haven’t reviewed our website, click here. Please call us at 701-461-8450 to get all the details about home mortgages and refinancing. There’s no cost, no obligation. Valley Mortgage does all the processing right here in our Fargo, ND office.