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Renting vs. buying a home: Which is right for you?

For sale and for rent sign
Images by Shutterstock/Illustration by Bankrate
For sale and for rent sign
Images by Shutterstock/Illustration by Bankrate

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It’s an interesting time to be debating whether to buy or rent. According to the U.S. Census Bureau, the national homeownership rate in the first quarter of 2022 was 65.4 percent — meaning about two-thirds of Americans are homeowners. Over the past two years, it seemed as if the entire other third of the population was racing to buy a home themselves, spurred on by record-low mortgage rates and fierce competition.

However, even with rates back up and the overheated market finally starting to cool, housing prices are still at historically high levels. Many people who can’t afford those inflated prices are choosing to wait out the market instead. But rents are also skyrocketing across the country. What to do? Renting and buying both have key advantages and disadvantages that should be considered before making a choice.

Renting vs. buying: Pros and cons

Pros Cons
Buying
  • May build equity that could be accessible through home equity products
  • No landlord to answer to
  • More stability (especially with schools)
  • Possible tax benefits
  • Can improve or upgrade home to your taste
  • 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
Renting
  • Fewer upfront costs and paperwork
  • Freedom to be more mobile
  • Not responsible for maintenance, repairs
  • No need to worry about falling home values
  • Builds credit (if your landlord reports rent payments to the credit bureaus)
  • No property tax bills
  • Landlord could raise rent
  • Might have to relocate on short notice if the landlord decides to sell the property
  • Builds equity for the landlord
  • Limited vacancies in competitive rental markets
  • No tax benefits
  • Less freedom in design choices (paint colors, appliances)

Is buying cheaper than renting?

The costs associated with renting vs. buying depend heavily on where you live and the local housing market. You can use Bankrate’s rent vs. buy calculator to help you break down many of these expenses.

Most rental properties require a security deposit, which protects the landlord against damage caused by the renter. You’ll usually put down the first and final month’s rent payments when you sign a lease. When evaluating a lease contract, ask whether your monthly rent includes utilities such as water, electric, gas or internet. Also, inquire about how the security deposit will be held and if it will accrue interest.

For homebuyers, one of the biggest costs of homeownership is the monthly mortgage payment. It includes principal and interest for the loan and could fluctuate over time if you have a variable interest rate. Your mortgage payment could also go up or down as property taxes or homeowners insurance premiums change.

If you’re purchasing a property in a homeowners association, or HOA, you’ll need to factor in monthly HOA dues. They generally cover landscaping, exterior maintenance and community amenities.

Also, be prepared for hidden expenses, like maintenance and repairs, that come with homeownership, and don’t leave yourself without cash in the bank after closing. These costs catch many first-time homebuyers off guard and may lead to buyer’s remorse and financial distress.

“During the homebuying process, the buyer will need to pay for a home inspection and for any quotes for repairs needed from contractors. They will also put down at least 1 percent of the sales price for earnest money,” says Michelle Hopson, a Realtor with Compass in Dallas.

A down payment — typically anywhere from 3 percent to 20 percent of the home’s purchase price — is another significant cost associated with homeownership. If you put less than 20 percent down, your lender will most likely require you to purchase private mortgage insurance (PMI), which increases your monthly payment. Your interest rate could also be higher with a lower down payment.

Differences between owning and renting

Renting versus buying a home isn’t just a matter of ownership. It can be a lifestyle choice as much as a financial one. Here are other key differences between the two options.

Building equity

While buying a home to live in shouldn’t be viewed strictly as an investment, homebuyers can capitalize on the equity (or the home’s value minus what’s owed on the home) that accumulates over time. If your home value goes up, you’ll earn more when you sell.

Plus, with a fixed-rate mortgage, you won’t have to worry about fluctuating monthly payments (as you could with rising rents). “In Dallas, where rents are high, it can almost be as affordable to purchase as to rent in many parts of the city,” Hopson says. “If you can qualify for a home and build some equity, that ultimately makes more sense than renting.”

That said, interest rates are on the rise and home values are starting to cool. A home purchase is a big commitment in any market, and you likely won’t accumulate a large amount of equity right away. Instead, you’ll build equity as you make payments and reduce your outstanding mortgage balance over time. If you decide to sell in the first few years, you likely won’t receive this benefit. In fact, with closing costs, it generally takes several years to recoup your money and see any equity gains.

Tax implications

Another factor for prospective buyers to consider is potential tax benefits. If you itemize deductions, you could lower your federal tax liability by taking the mortgage interest deduction.

According to the most recent IRS Publication 936, “you can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million [$500,000 if married filing separately]) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.”

Deductions shouldn’t be the sole deciding factor, though, because your rent could end up being the same or less than the after-tax cost of homeownership. Property taxes depend on where you live and the appraised property of the home you buy, but they can be steep.

Maintenance costs

Homes need repairs and maintenance over time, and when you’re renting, those costs are generally the landlord’s responsibility. For instance, in an apartment, if the HVAC system or refrigerator breaks, the landlord has to fix it.

On the other hand, as a homeowner, you’ll be on the hook for those repairs and ongoing seasonal maintenance, and this can add up fast. Even if you’re handy and plan to do your own upkeep, you might not be able to commit to this maintenance over time.

Katie Schanck, a Realtor with Keller Williams in Atlanta, advises her clients to factor in these costs when evaluating whether they can afford to purchase a home. Schanck encourages buyers to carefully review the seller’s disclosure and get a home inspection to be aware of potential red flags.

Should I rent or buy? 7 key questions

The answer to the rent vs. buy debate isn’t cut and dried. Here are seven questions to ask when considering renting vs. buying:

  1. How much can you afford in monthly housing costs?
  2. Are you prepared for a long-term investment?
  3. How long do you plan to stay in the home? (One rule of thumb: If it’s less than five years, you might want to rent.)
  4. Do you want stability or flexibility?
  5. Can you afford home repairs/maintenance costs?
  6. What are your financial, career and family goals? (Do you plan to relocate for work? Go back to school? Expand your family?)
  7. Is homeownership in the neighborhood you want to live in affordable, or will you need to relocate?

If you’re moving to an unfamiliar city, have an unstable job situation or don’t know what neighborhood will feel like home, renting for a period of time can be a great option.

“During that rental period, people really get a sense for what they like or don’t like, and we can also start exploring different purchasing options during that time,” Schanck says.

In addition, while no one has a crystal ball, it’s important to evaluate your current life situation and how much it’s likely to change in the immediate future.

“I recommend clients who are going through life changes, like divorce or downsizing, to rent as a way to decompress before making a large purchase that may not be right for their new lifestyle,” Hopson says.

Schanck agrees, urging her clients to think ahead: “I encourage clients who have a changing personal situation, such as getting married or planning to have a child soon, to look at properties they’re not going to outgrow quickly.”

Another consideration: Can you afford a home that will fit your lifestyle in the next few years, or will a tight budget limit your options? For many people, renting or buying comes down to what they can afford at the moment.

Bottom line

Ultimately, deciding between renting and buying a home is a personal choice. If you haven’t determined which is best, it may be helpful to speak with a real estate agent who can help you weigh your options and make an informed decision.

Written by
Jennifer Bradley Franklin
Contributing writer
Jennifer Bradley Franklin is a multi-platform journalist and author, often covering finance, real estate and more.
Edited by
Senior real estate editor
Reviewed by
President, Real Estate Solutions