Is it better to rent or buy? This is a common question among consumers considering homeownership. To answer it, you’ll need to look at your current financial situation, long-term plans, and personal goals. Homeownership isn’t for everyone, and there are benefits and drawbacks of renting vs. owning a home.
Calculating the costs of renting vs. buying
Is it cheaper to buy or rent a house? To decide, many consumers compare their estimated mortgage payment with what they pay in rent. It’s also important to think about the up-front and ongoing costs to both choices.
Here are some factors to think about to determine if it’s better to rent or buy a home.
Will your rent payments go up?
When you’re a renter, it’s always a possibility that your landlord can hike your monthly rent payment when it’s time to renew your lease. In fact, the average monthly asking rental price soared 15% year over year in February, according to a recent report from Redfin, a national real estate brokerage. That’s a record high of $1,901 in monthly rent. In some housing markets, renters saw 30% to 40% increases in asking rent payments.
It’s no secret that home prices and mortgage rates are rising, too. In the same Redfin report, the national median monthly mortgage payment jumped 31% in February compared to the year prior. With these rising costs, some consumers may opt to rent and “wait out” the market. Keep in mind, though, that renting means you’re paying your landlord’s mortgage and building their equity instead of your own wealth.
Can you afford to buy a house?
The monthly mortgage payment provides only one piece of the puzzle when evaluating homeownership costs. You’ll also need to save up for the down payment and closing costs.
Fortunately, some first-time homebuyer programs require no money down or have low down payment minimums starting at 3% for some conventional loan programs, making buying a home easier financially. However, putting little or no money down means your mortgage payment will be larger than if you made a more significant down payment.
If your down payment is less than 20%, you might have to pay mortgage insurance, depending on the loan program. Mortgage insurance is coverage that protects the lender’s financial investment to lend you money if you don’t repay your mortgage. For some loan types, such as loans insured by the Federal Housing Administration, you’ll pay an upfront and annual mortgage insurance premium, which adds up.
Closing costs, which include all third-party charges you’ll pay during the purchase, can range from 2% to 5% of the home price. So, for a $300,000 home, expect to pay $6,000 to $15,000 — in addition to the down payment amount.
Should I buy a house now or wait?
While renting involves some upfront costs such as a security deposit, or multiple months’ rent, renters typically receive those funds back, or they go towards covering rent. To figure out if it’s better to rent or buy now, be realistic about your ability to handle the initial costs.
What kind of mortgage rate can you get?
The type of mortgage you qualify for and the interest rate you get play a factor in the loan’s affordability. To determine your interest rate, lenders will evaluate your income, credit scores, down payment, debt-to-income ratio, and amount of savings. These factors also determine what size loan you’ll qualify for.
Buying a house: What can I afford?
As a renter, your financial situation may also affect your ability to rent, depending on the landlord’s or management company’s requirements. However, a low credit score or other negative factors may be easier to overcome when renting rather than buying a home.
You’ll need to consider whether your current financial situation will result in a competitive interest rate and loan terms or whether waiting will put you in a better position.
Have you accounted for the costs of owning a home?
When using a mortgage affordability calculator to estimate your loan payment, make sure it calculates PITI: principal, interest, taxes, and insurance. Some calculators only estimate principal and interest, giving consumers a false perception of what they can afford.
In addition to property taxes and homeowners insurance, you may also have to pay mortgage insurance, depending on the type of loan you qualify for, and homeowners association (HOA) dues, if the home is located in a development with an HOA. Don’t forget about the hidden costs of homeownership: paying for repairs and ongoing maintenance. Plan to budget about 1% of your home’s purchase price annually for these costs.
Buying vs. renting a house pros and cons
Deciding if it’s better to rent or buy isn’t cut and dry. While there are many advantages of buying a home, being a homeowner isn’t for everyone. Similarly, renting has its own benefits and drawbacks.
Here’s a closer look at buying vs. renting pros and cons.
Pros of renting
Cons of renting
|Low upfront expenses. Moving to a new rental has lower upfront costs compared to buying a home.||Instability. Your landlord might decide to sell the property and terminate your lease unexpectedly.|
|Flexibility. You’re not tied down to a home beyond your lease term.||Rent increases. You’re subject to rent increases when you renew your lease.|
|Fewer ongoing housing expenses. Renting is typically less expensive than homeownership.||Doesn’t build equity. Your monthly rent payment doesn’t go towards building equity or creating wealth.|
|Less responsibility. You’re usually not responsible for lawn care, maintenance, or repairs.||Limitations on customizing your space. You generally can’t make physical changes to the home. Pets might also be prohibited.|
|Stable housing costs. Your monthly housing costs won’t fluctuate due to repairs, increases in taxes, etc.||No tax benefits. Renting doesn’t provide you any tax perks or deductions that come with homeownership.|
Pros of buying a house
Cons of buying a house
|Builds equity. A portion of your mortgage payment goes towards building equity in the home.||High initial costs. The down payment, closing costs, and other fees can make purchasing a home a financial challenge.|
|Opportunity to build wealth. Your home value may increase over time, creating long-term wealth.||High ongoing costs. You’ll pay a monthly mortgage payment, along with taxes, homeowners insurance, maintenance, and repairs.|
|Stability. Owning a home provides an opportunity to lay down roots and remain in an area long-term.||Loss of flexibility. Moving is harder to navigate as a homeowner, and you might have a difficult time selling when you need to.|
|Freedom to customize your home. You can decorate and renovate how you wish.||Additional responsibilities. You’re responsible for all maintenance and repairs, and may have to follow restrictive HOA rules.|
|Potential tax benefits. Some homeowners can deduct mortgage interest and other home-related expenses.||Possible loss of value. Your home value is not guaranteed to be higher when you sell or move.|
Is it better to buy or rent a home?
While there are multiple pros of buying a house, some consumers may delay or avoid homeownership when considering their lifestyle and long-term goals. Owning a home means less flexibility to move to a new house or area. Consumers who enjoy the freedom to change their environment might consider homeownership a burden and prefer to rent.
Why might people choose to buy?
Consumers choose homeownership for a variety of reasons. Many buyers purchase for the pride of homeownership, while others desire the stability of owning a home and the ability to lay down roots. Others see it as a way to build long-term wealth. Owning your own home means you can remodel and decorate it the way you want (unless you’re in an HOA that has specific restrictions).
Additional advantages of buying a home include having more space and the opportunity to remain in a desired neighborhood or school system long-term.
Why might people choose to rent?
Renting long-term isn’t for everyone, but many people opt for renting vs. owning a home. If you move often or travel extensively, it may make more sense to rent instead of being tied down to a home or one location. For others, renting makes financial sense if they have difficulty coming up with the down payment and closing costs to buy a home or can’t handle the ongoing expenses.
Additionally, renting comes with fewer responsibilities than owning. Renters typically don’t have to worry about lawn care and other maintenance responsibilities. Consumers who don’t want the hassle of taking care of those things (or those who are physically unable to maintain a home) may prefer to rent.
Finally, the initial and ongoing costs of homeownership are considerable compared to renting. Even in an area where a mortgage is cheaper than rent, the additional maintenance and repair costs can make homeownership a daunting endeavor for some.
Are you ready to own a home?
To fully answer is it better to rent or buy, look beyond the financial costs of each path. Owning a home is a significant commitment, and prospective buyers often underestimate the personal and emotional impact of homeownership. Here are some things to consider.
Think about your short-term and long-term plans as you weigh renting vs. owning a home. Do you see yourself staying in the area where you might buy today? Are you likely to go through life or career changes that will be difficult to navigate as a homeowner? Will the property you can afford now meet your lifestyle needs three, five, or 10 years down the road, or would you need to move up into a larger space as your family grows? How does owning a home fit in with your long-term personal goals?
While it’s impossible to predict the future, think about how homeownership fits in with your life and financial goals down the road.
Mobility vs. stability
One of the advantages of buying a home is the stability it provides. But that stability comes at the expense of flexibility. As you weigh whether it’s better to rent or buy, be realistic about your need to move quickly or often.
If you like moving every few years, homeownership may not fit in well with that lifestyle. On the other hand, if you’re looking to settle in one place for a while, then homeownership can provide the opportunity to turn a house into a home while building long-term wealth.
Responsibilities of homeownership
New homeowners are often surprised by the full responsibility of homeownership. Not only will you be investing in your home financially, but you’ll also experience the emotional and social impacts of owning a home. You’ll be committing to a neighborhood and community and will have to navigate the ups and downs of homeownership.
Ready to explore your mortgage options as you think about homeownership? Contact a local Finance of America Mortgage Advisor today.