Renting Vs. Buying: What’s Right for You?
Deciding whether to rent or buy a house is a big deal. Apart from money, your lifestyle, your future, and what feels right for you right now are also important.
You could be sick of wasting money on rent and want to know if it would be smarter to buy a house. Or maybe you're not ready to settle down yet and want the freedom that renting gives you.
No matter what your situation is, the decision is ultimately yours. In this article, we'll list the pros and cons of each choice to help you decide which one is best for you. Let's jump right in!
If you really want to get started, Rate's Same Day Mortgage can help you see exactly how much you can afford so you can see if now’s a good time to move forward.
Benefits of Renting
Let's look at some of the best reasons to rent.
Lower Initial Costs
When you rent, you usually only need to pay a few month's rent and a security deposit. You won't have to worry about saving for a big down payment or closing costs which are needed to buy a house, and can cost a lot of money upfront.
Additionally, not having to worry about the costs of buying allows you to move into an apartment faster. This is especially helpful if you’re renting for the first time or saving for a bigger investment in the future.
Flexibility and Mobility
When you rent, you have more freedom than when you own your own home. You can rent instead of buying if your job needs you to move or if you just want the freedom to move without making a long-term commitment.
Most leases last between one and two years. When your lease is up, you can move without having to sell your home or worry about home value, which can be a hassle.
Less Maintenance Responsibility
The landlord takes care of most of the repairs and maintenance of the rental unit. If an appliance breaks or there's a plumbing problem, you can call the landlord or property manager and they'll fix it.
This cuts down on the time and money needed for home maintenance, so you can enjoy your place without worrying about how much repairs will cost.
No Property Tax Burden
One of the biggest benefits of renting is that you don't have to pay property taxes. Property taxes can be a big cost for homeowners that can go as high as several thousand dollars every year, depending on where the home is located.
Renters, however, don’t have to worry about this extra cost. In many cases, renters can bundle fees like renters insurance into their monthly rent, making it easier for renters to budget without the fear of large, unexpected bills.
This can be particularly helpful for young professionals or people just starting their jobs who are focused on building savings.
Benefits of Buying
Homeownership also comes with its own set of advantages, including:
Building Equity
Each mortgage payment you make adds to owning a bigger share of your home, which ultimate gets you one payment closer to the American dream.
As you make payments on the principal and the value of your home rises, the more equity you accumulate, which can increase your net worth substantially.
This equity can serve as leverage for future financial decisions like applying for a home equity line of credit (HELOC) or taking out a loan for other investments.
Stability and Predictability
When you get a fixed-rate mortgage, owning a home gives you stability. Unlike renting, where your rent can increase each year, a fixed mortgage rate guarantees the same monthly payment throughout the life of the loan.
This gives you the ability to plan your finances with security, knowing exactly what to expect. In contrast, rent hikes can make budgeting difficult, especially if your landlord decides to increase the rent annually.
For people who want to stay in one place for a long time, owning a home provides stability and safety.
Tax Benefits of Homeownership
Homeowners enjoy several tax benefits that renters don’t have access to. For example, the interest paid on a mortgage and property taxes may be deductible from your taxable income.
These tax deductions can result in larger savings at tax time, which makes owning a home even more financially appealing.
Depending on your circumstances, you may also qualify for other homeownership-related tax benefits like credits for energy-efficient home upgrades. These small deductions add up over time and help your finances in general.
Ability to Rent Out the Property
Once you own a home, you have the flexibility to rent out part or all of the property if you want. This can provide an additional income stream, and in some cases, it can help offset your mortgage payments or even generate enough income to cover your mortgage payment entirely.
Costs / Cons of Renting
Let's take a look at the main costs and cons of renting.
No Equity Accumulation
When you rent, your monthly payments are essentially going toward someone else’s mortgage. Unlike homeowners, renters don’t build equity in the property. This means that while you’re paying for a place to live, you’re not gaining any ownership over time.
Rent Increases Over Time
Renters are often at the mercy of their property managers when it comes to rent hikes. If the market goes up, so can your rent. These increases can make long-term planning difficult, as you might find yourself paying more and more each year without getting any ownership of the property.
Limited Personalization
Renting often means that you’re limited in how much you can personalize your living space. Many property managers don’t allow tenants to paint walls, change fixtures, or make other alterations to the property.
This can be frustrating if you want to make your space truly your own.
Uncertainty of Lease Renewals or Rising Rental Costs
Another drawback of renting is the uncertainty surrounding lease renewals. While you may love your renting home, your landlord may decide not to renew your lease or might choose to raise the rent to an unaffordable level.
You have no control over what happens when their lease term ends, which can make your living situations feel insecure.
Costs / Cons of Buying
While buying can be a great investment, there are some downsides to consider before you jump in:
High Initial Costs
The high costs up front are one of the biggest problems you can face. A down payment, closing fees, and moving expenses can add up quickly.
Depending on the loan type, you may need to put down anywhere from 3% to 20% of the home’s purchase price. If you’re not prepared for this, it can be difficult to enter the housing market.
Maintenance and Repair Costs
When you own a home, you're responsible for maintenance, repairs and the upkeep of your home. This can include everything from fixing leaky pipes to replacing the roof.
Over time, these fees can add up, and you’d also need to plan for unexpected costs. People who rent don't have to pay or worry about these costs.
Property Taxes and Insurance
Property taxes, homeowners insurance and homeowners association costs are three other big expenses that you would have to incur every year as a homeowner. Each of these costs can be different depending on where you live, which can add to the monthly cost of being a homeowner.
Home Market Risk and Depreciation
The value of your home may not always go up because the real estate market changes all the time. You also might find that your home is worth less than what you paid for it if the market goes down but it’s recommended to check out the market risk with a credible realtor.
What Factors to Consider Before Deciding to Rent vs. Buy a Home
Here are key things to consider before making this important decision:
Should You Rent or Own Your First Home?
As a first-time buyer, you’re facing a mix of excitement and fear. Buying a home can build wealth and provide stability, but it also comes with financial and emotional duty.
Think about job stability, how long you plan to stay in one place, and whether you can handle the upfront costs of buying a home. You can also use Rate’s Rent vs. Buy Calculator to get a better idea of what’s best for you.
Is It Cheaper to Rent or Buy a Home?
The affordability of renting versus buying depends on different factors, including your location, the length of time you plan to stay, and local market conditions.
In some areas, renting may be more affordable in the short term, while buying could be a better long-term investment. Look at your financial future and compare the costs of both choices.
What is The 5 Rule Rent Vs. Buy?
The "5 Rule" is a simple formula often used to determine if renting or buying a home is the more financially viable option. Here's how it works:
- Home Price: Multiply the purchase price of the home by 5. This gives you a benchmark for the annual rent equivalent.
- Cost of Renting: Compare this benchmark with the cost of renting the same or similar property.
- Monthly Rent Payment: If the annual rent cost is higher than the home price multiplied by 5, renting may be the better option.
- Interest Rates: Consider mortgage interest rates. If rates are low, purchasing might make more financial sense as monthly mortgage payments (including mortgage insurance) may be more affordable than rent.
- Financial Situation: Evaluate your credit score and financial situation, including your ability to afford maintenance costs, home renovations, HOA fees, and property taxes.
This rule is a useful starting point for financial planning and considering whether to rent or buy based on your financial situation, interest rates, and other housing costs.
Can You Rent an Apartment While Having a Mortgage?
You can rent out a home while still having a mortgage, but you need to be able to afford it and in some cases get permission from your lender. You should also be clear about any changes that could happen to your taxes and credit terms if you ultimately decide to rent out your home.
How Much Should a House Down Payment Be?
Typically, a down payment is around 20% to avoid mortgage insurance and secure a better interest rate. However, many home buyers can put down as little as 3-5%, especially with government-backed loans. Your personal finance like your credit score, financial situation, and home purchase cost will affect the amount you need.
In competitive markets like New York or California, a larger down payment may help you stand out.
You can use our rent vs. buy calculator to check and see if a larger down payment makes financial sense using different monthly mortgage payments, maintenance costs, and homeownership taxes.
Ready to Take the Next Step in Homeownership?
This is a big choice: to rent or buy? You're on the right track by weighing the pros and cons. Rate's Same Day Mortgage Pre-Approval is the next step you should take if you want to buy a home.
It helps you feel confident about your next steps by showing you exactly what you can afford. Are you ready to move forward? Put in your digital application today and get your dream house!
Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Rate, Inc. for current rates. Restrictions apply.
Rate, Inc. does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation.