Ahh yes, the age-old question: is it better to rent or buy a home in Ann Arbor, Michigan?
As a real estate company, we are very passionate about the many benefits of homeownership, especially when it comes to the Washtenaw County housing market. However, we are aware that it is not always feasible or wise for everyone to buy a home, due to their unique financial situation or intentions for the future.
Spoiler Alert: As a broad generalization, we are under the impression that it is better to buy a home in Ann Arbor than to rent, due to the long-term financial benefits associated with homeownership. But let’s explore the specific data supporting this and the questions you should ask yourself in order to determine the best path for you.
Housing Prices Are Going Up
Sure, with historic housing prices and an extra competitive atmosphere amongst buyers, the last two years have been a difficult time to get involved in the market. But that doesn’t mean you should rule out the possibility of buying altogether! According to our October 2021 report, the median price of single-family homes in Ann Arbor was $510,000, which was up 12% compared to 2020. While the market is expected to cool down after an unusual couple of years, housing prices are likely to show a steady increase in the long-term. So the sooner you become a homeowner, the more you can take advantage of this upward trend in the years ahead.
Interest Rates Are Still Relatively Low
In 2020 and 2021, we saw some historic record-breaking interest rates, dropping as low as 2.65% for a 30-year FRM in January 2021. Although we saw a small hike at the start of this year, hovering around 4%, this is still relatively low compared to past rates over the last several decades. In fact, if you look at the history of rates, we entered the new millennium with a rate of 8.25%, which is more than double where we are today. And don’t even get us started on the 18.44% in October 1981…
But, as you may have heard, interest rates are expected to continue rising in 2022. That’s why now might be the best time to take advantage of the current rates!
Rent Prices Are Increasing + Unpredictable
Simultaneously, rent prices are increasing at a similar rate. Plus, this is something you cannot control as a renter, as your landlord has the option to increase rent whenever they want to. This creates an unstable financial situation and an uneasy feeling overall for renters. According to Point2Homes, the average rent for a single-family home in Ann Arbor is about $2,784 and a rented apartment typically costs about $1,749, which is an 11.1% increase compared to the previous year. And if the city follows the trajectory of the nation as a whole in 2022, rent prices will only continue to go up!
The Financial Benefits of Homeownership
While homeownership does come with some additional costs (more on that later!), there are several financial benefits associated with owning a home. Some of the major advantages include building equity, stability in payments, tax deductions, an increased credit score, and more.
When you are renting, you are essentially handing over money to your landlord on a monthly basis that you will never see again. Plus, as mentioned, there is no guarantee that your rent will stay the same! Instead, when you own your home, you are investing money towards owning more and more of your home over time. Your equity increases in two ways: 1) as the value of your home goes up over time, and 2) as you pay off more and more of your loan.
Plus, you can take advantage of a number of tax deductions, you can improve your credit score, etc. Here are some of the major financial benefits of homeownership.
Things to Consider:
Before you go ahead and move forward with either renting or buying, there are a few questions you should ask yourself. That’s because each individual situation is different than the next — and what is wise for someone else may not always be the wisest decision for you.
How Long Am I Planning on Living in the Home?
As much as you are able to predict, how long do you envision yourself living in your next home? If you are new to the Ann Arbor area, you may not even know if you’ll stay here for long. Or upcoming lifestyle changes (like a marriage or the addition of kids) may require some changes to the size or location of your home. As a good rule of thumb, if you are planning on living in a place for two years or less, you should consider renting. But if you plan to live in the home for more than three years, buying may be the wisest choice.
If you are new to the area, you might consider renting for 6–12 months to get acquainted with the community, and then get a plan in place to start searching for a home once your lease is almost up!
Am I Financially Stable?
Your financial status is perhaps the most important factor in the buying vs. renting discussion. Buying a house is one of the biggest — if not the biggest — purchase you will ever make, so you want to make sure you can actually afford it. Ask yourself if paying the estimated down payment would cause significant financial strain on you and your family. If so, consider renting instead. And overall, it’s important to understand just how much house you can afford before you start shopping within the wrong price range.
The mortgage professionals at John Adams Mortgage Co can help you assess your budget, and even help you get pre-approved for a mortgage loan. They also have a buying vs. renting calculator, where you can input your expected new home purchase price and your down payment and compare it with what you estimate your rent would be. It then calculates which will be best, and about how long it takes for buying to make the most sense.
Do the Benefits Outweigh the Risks?
At the end of the day, it’s about balancing the risks with the rewards. Because we all know that there are certainly risks associated with homeownership, as the market could take a downward turn or you could face a lot of maintenance-related costs that you did not anticipate or budget for. And yet, there is opportunity for great reward — including both the financial opportunities we mentioned and the stability associated with homeownership. Studies show that those who own their home are more likely to get involved with the local community, hence creating a sense of belonging and stability. Ask yourself if you are willing to take the risk in order to reap the benefits.
If you are looking to buy a home in the Ann Arbor area, we can definitely help with that! Our agents have decades of experience in real estate and are knowledgeable about both the buying/selling process and the nuances of the local market.
And if you’ve decided to rent instead, we can help with that too! We offer a free apartment search service and regularly share Reinhart-managed rentals that are available.
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