Should I rent or buy my next home?

It's a fundamental question faced by anyone planning for housing needs: Am I better off renting or buying my next home? Let's look at some key factors.

Are you in it for the long haul?

The length of time you'll stay in your next home is a critical consideration. Generally, it is not recommended to buy unless you'll be in the home for at least three years.

There are two reasons for this: Closing costs and price volatility.

Closing costs

When you get to your closing appointment, you're handed a hefty bill that you need to pay before you get the keys. These closing costs cover things such as mortgage interest rate discount points, document preparation, property appraisal and inspection, flood-zone determination, notary fees, title insurance, termite inspection and more. You also must pay prepaid interest until the first payment is due, property taxes and insurance.

Add them up, and they typically range from 2% to 5% of the purchase price. On a $200,000 home, that's $4,000 to $10,000. Let's say your costs are in the middle at $7,000. If you're in the home for just two years, that means you've effectively added $3,500 a year to your cost of living there, compared to renting.

It also means it'll be harder for you to break even when you sell the house. Not only would the price have to go up enough to recoup the closing costs, but you may also have to pay a seller's commission that averages around 6% of the sales price.

Price volatility

Over time, real estate prices have generally trended higher. Over short periods; however, house prices can move down sharply.

It's important to emphasize that the caution about owning for at least three years is no guarantee against a loss in value. For an extreme example, consider what happened in Phoenix during the last financial crisis.

According to Zillow®, the Arizona capital's median home sale price in October 2008 was $153,000. Three years later, it was just $91,100 — that's a decline of almost $62,000 or 40%. While you may be able to stay in the house until prices rebound, a career change or family situation may force you to sell at a loss.

Are you financially ready for ownership?

In addition to closing costs, you'll likely need to come up with a down payment. If you're eligible for a loan guaranteed by the Department of Veteran Affairs (VA), you may get to sidestep the down payment. But the less you put down, the higher your monthly mortgage payment will be.

When assessing your ability to cover closing costs and down payments, avoid looking at money in a 401(k), IRA or other retirement account. If you were considering looking at money in a 401k, IRA or other retirement account for closing costs or down payments, speak to a tax professional.

Down payments and closing costs can be hurdles by themselves, but they're just the beginning of the total cost of homeownership. Other expenses can include:

• Insurance: A homeowners policy can cost significantly more than a renters policy.
• Homeowners association (HOA) dues: Not all neighborhoods require them. But if yours does, it could cost hundreds or thousands of dollars a year.
• Maintenance and repairs: As an owner, when something wears out or breaks, you're on the hook for the cost to fix it.
• Property taxes: Rates vary depending on where you live and the assessed value of your home.

Benefits of buying

One of the greatest potential benefits of homeownership is the chance to build equity. Equity is the difference between the value of your home and the amount you owe. So when home prices are stable or rising, every mortgage payment increases your wealth.

Homeownership has some federal income tax benefits, too. You may be able to deduct property taxes and the interest you paid on your mortgage – with some limits. Keep in mind, these deductions are only relevant if you itemize instead of taking the standard deduction. Tax laws can change, so it's a good idea to consult your tax advisor about your situation.

Another advantage of homeownership is the freedom to modify your home to suit your preferences — paint colors, landscaping and window treatments. Just make sure that you follow any HOA rules.

As a homeowner, you also won't need to brace every year for a possible increase in your monthly rent. If you have a fixed rate mortgage, you've locked in a big portion of your housing costs. Some costs, though — utilities, maintenance, insurance and property taxes — are likely to rise over time.

Benefits of renting

One major advantage of someone else owning your home is that they're responsible for fixing it. That saves you money and the time, hassle and anxiety involved in figuring how to get things fixed and who should do the work.

Move-in cost is often less expensive for renters, because you avoid spending thousands on a down payment and closing costs.

Your ongoing, out-of-pocket expenses tend to be lower, too, since many of them — property taxes and insurance on the structure — are your landlord's responsibility.

The renter's advantages extend all the way to moving out. Rather than having to go through the process of selling your home — and facing the possibility of not finding a buyer — moving on is as simple as giving your landlord notice and packing up. Depending upon the terms of your lease, you may be responsible for early termination fees or payment of any remaining rent.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.