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Is It Better to Rent or Buy a Home? Tips on How to Decide

Published on: December 14, 2021

is it better to rent or buy

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.

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. 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 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.

 

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.

Additional advantages of buying a home include having more space, customizing the property, and the opportunity to remain in a desired neighborhood or school system long-term.

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.

Also, the initial and ongoing costs of homeownership are considerable. 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. Additionally, the physical responsibilities of owning a home – taking care of a yard, cleaning gutters, painting, and so on – are significant, and some consumers may prefer not to take them on.

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.

Calculating the costs of renting vs. buying

As consumers try to answer is it cheaper to buy or rent a house, many compare the estimated mortgage payment with what they pay in rent. While that’s a good start, there’s more to consider. Here are some factors to think about to determine if it’s better to rent or buy a home.

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. Additionally, you’ll have to pay moving costs, purchase furniture or appliances, and make initial deposits on utilities.

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 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.

Is it cheaper to buy or rent a house?

Beyond the mortgage payment, homeowners also have to budget for home maintenance and repair costs. Some sources recommend homeowners budget 1% to 3% of a home’s value each year for maintenance. For a $300,000 home, that’s about $3,000 to $9,000 per year, or $250 to $750 monthly.

Maintenance and unexpected repairs can be even more costly, depending on the condition and age of the home. That’s why it’s critical for homeowners to have enough savings if, say, a kitchen appliance breaks or a plumbing disaster strikes.

When factoring in the additional expenses of maintenance, repairs, and emergencies, the cost of owning a home is usually more than renting, even in areas where a mortgage is cheaper than rent.

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 to help you answer, should I rent or buy?

Long-term plans

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.

If you’re not fully prepared for the role of homeowner, consider waiting or exploring alternatives to buying a house, such as renting with the option to buy.

Ready to explore your mortgage options as you think about homeownership? Contact a local Finance of America Mortgage Advisor today.

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