Money Smarts: Should you Rent or Buy a Home?

Home ownership comes with benefits that a renter could never get-but also, a few unique problems.

Life, liberty, and owning a split-level five-bedroom ranch are often thought of as the American dream, right?

Not so fast. Plenty of Americans happily rent a home instead, and they're looking pretty smart right now. Which version of the American dream home should you reach for?

Theory meets reality

Not too long ago, home buying was considered a safe bet.  Buy a great house and live in it as a primary residence for two out of five years, and reap tax benefits from the mortgage interest payments while building home equity.  When it was time to move on, you could sell the property and not pay taxes on capital gains up to $250,000 in profit. Then, the cycle would start over in the next, presumably larger and more expensive home.

That's not how it works anymore. Home prices that had been climbing steadily skyward for years hit a wall and then came crashing down.  Many homeowners are sitting on larger loan balances than equity values. Suddenly, renters look very smart.

The renter's case

A house is probably the largest purchase you'll ever make, and almost always financed by the biggest loan of your life. For many years, the vast majority of your mortgage payments will do nothing but pay interest charges. The huge equity balance comes much later, and many owners will move before getting that far. The dream of home buying seems a bit silly from that perspective.

Furthermore, a homeowner has to worry about upkeep and maintenance, as well as property taxes and community fees. Those who rent don't have such headaches.

The buyer's case

On the flip side, home buying can be incredibly profitable when the market isn't working against you. And in at least a few areas around the country, home prices may already have dipped as far down as they're going to go. Sure, the gravy train of the early 2000s won't magically restart again; but when you're truly at the bottom, the only way to go is up.

The bottom line

It's simple mathematics, really. If you believe that home prices will rise from here, at an annual rate that would beat the returns you'd expect from investing that cash elsewhere, it might make sense for you to buy a home. It's a great way to build a solid credit history, and the profit at the end of the road is extra gravy. And let's be honest-the stock market hasn't impressed anybody lately, either.

If you don't want the risk or bother of home ownership, renting a house, condo, or nice apartment would be the better way to go. While it's true that a homeowner can build a sun deck or repaint the walls anytime he chooses, many people aren't really into home improvement, and would rather leave upkeep and improvements to the landlord.