Weighing the rent-versus-buy decision? Both have upsides and drawbacks. Ultimately, the answer depends on multiple factors, including your finances, your long-term plans and the real estate market in your area. Here are five questions to ask when deciding to rent or buy a home:
- What can you afford and how much savings do you have?
- How long do you plan to stay in the home?
- Do you want stability or flexibility to move around?
- Do you want to be responsible for repairs/maintenance?
- What are your financial, career and family goals?
Renting vs. buying a home: Calculating the costs
The first consideration in the rent vs. buy decision is often how much each will cost. If you rent a home, your monthly costs are generally fixed for the term of the lease. Your monthly rent may or may not include utilities such as electric, gas, cable or internet. Most leases require the first month’s rent, last month’s rent and a security deposit equal to one month’s rent in advance. For an apartment that costs $1,000 per month, you’d typically need $3,000 up front. Keep in mind, though, that landlords can in most places increase the rent as much as they like when the lease ends or sell the property you’re renting, so you may have to move a few times.
The good news: When you’re a tenant, your landlord is generally responsible for fixing any issues with the property, whether it’s a leaky roof, a cranky furnace or a burst pipe.
You can use Bankrate’s rent vs. buy calculator to help you crunch numbers and determine whether renting or buying option is better for you.
How much house can I afford?
When buying a home, most mortgage lenders require a down payment between 3 percent and 20 percent of the home’s price. Some loans may have a lower threshold, but down payments below 20 percent will mean paying for private mortgage insurance, or PMI, which is an additional monthly expense. You’ll also pay closing costs, which average 2 percent to 4 percent of the home’s price. A
mortgage calculator can give you a rough estimate of your monthly payments, including your interest and principal outlays and other expenses such as property taxes, homeowners insurance and, in some cases, homeowners association dues. A housing affordability calculator can help you determine how much house you can afford. But our financial responsibility doesn’t end with your monthly mortgage payment. You’ll also need to pay for utilities, maintenance and repairs, whether it’s a few bucks to fix a leaky faucet or thousands to replace a roof.
Should you buy or rent? Here’s what to consider
- May build equity and credit
- No landlord to answer to
- More stability (especially with schools)
- Possible tax benefits
- Can improve or upgrade home to your tastes
- Property tax bills
- Requires substantial money, paperwork upfront
- Could lose money if home values decline
- Extra expenses beyond mortgage payments
- Rising home prices and low inventory in many markets
- Responsible for repairs, remodeling
- Fewer upfront costs and paperwork
- Freedom to be more mobile
- Not responsible for maintenance, repairs
- No need to worry about falling home values
- Built credit (if your landlord reports rent payments to the credit bureaus)
- No property tax bills
- Landlord can raise rent or sell the property
- Choices may be limited depending on vacancies
- Might have to move multiple times
- Don’t build equity
- No tax benefits
Reasons to buy a home
Buying a home can be a great investment. If home prices in your area have been rising, buying now can help you stay in a neighborhood that you might otherwise be priced out of in a few years. And even if you don’t end up staying long term, a sharp rise in local property values could mean a sizable profit when you sell. Some indications that buying may be right for you:
- You plan to stay in the same place for more than a few years.
- You’d be willing to rent out part or all of your home, should your plans or finances change.
- You’re eligible for a prime-rate mortgage, with payments you can afford.
- You’re willing to put some “sweat equity” into a fixer-upper, allowing you to buy something more affordable. You can increase the home’s value with improvements over time.
Reasons to rent a home
Though owning your own home can offer a sense of security, homeownership has its drawbacks — remember the roof replacement? Getting out of a lease is also much less of an ordeal than selling a house, so if you’re not sure where you’ll be next year, renting can save you some costly headaches. Some indications that renting may be right for you:
- You aren’t sure how long you’ll be in the home because of work, changing family circumstances or other reasons.
- You won’t be able to afford — or don’t want to bother with — the maintenance or repairs a house may need.
- Your finances are variable or likely to change soon, potentially making it difficult to keep up with mortgage payments.
Want flexibility? Then rent
You are more mobile when you rent because you can move out at the end of the lease. Buying a home entails a lot of upfront costs, from the down payment to inspections to loan fees. Renting carries fewer upfront costs.
Equity is great when you build it
On the other hand, renting has a major drawback: You don’t build equity.
What is equity? When the home’s value rises while the mortgage debt falls as you repay it, you’re “building equity.”
Home’s value – Mortgage debt = Equity
“History shows that homeowership is a pretty good investment,” says Malcolm Hollensteiner, Mid-Atlantic director of mortgage at United Bank in Glen Burnie, Maryland. However, if home values fall or you run into trouble repaying your mortgage, you stand to lose money. Your finances and credit could take serious hits if you fail to repay your loan.
Compare home appreciation with rent
It’s a good idea to balance home-value appreciation with the upfront costs of buying. Richard Green, a professor at the University of Southern California, Los Angeles, offers this rule of thumb: “If house values have to go up about 3 percent a year over rent for you to break even, then, depending on your living in a place for five years, buying is a better bet than renting. If you have to get 5 to 6 percent appreciation every single year, then you are better off renting from a purely financial standpoint.”
Think of school
If you have young children, owning a home lets you lock in your housing costs so you can give the children the stability of staying in the same school district for an extended period.
Exploit the tax advantage if you can
Another factor to consider is whether you will be able to deduct the mortgage interest expense. Tax laws allow those who itemize their taxes to write off their mortgage interest payment, which means you pay less for your mortgage. But not everyone is eligible to itemize deductions, and changes to the tax laws in 2018 will mean more people won’t be able to deduct mortgage interest and property taxes.
Don’t make it your primary investment
If you are focused on the investment potential of owning your home rather than the softer aspects of security and stability, then you might be better off renting. “The idea that homeownership doesn’t carry a lot of risk with it is wrong,” says Green, the USC professor. “If you are in a mutual fund, with a long-term perspective, it is probably going to grow faster than real estate values. Housing can be more volatile than you think (depending on location).”