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

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Renting vs. buying a home is a big decision, and there are pros and cons to each option. In recent years, a higher percentage of  U.S. households were renting than at any point since 1965, according to a Pew Research Center report.

Renting vs. buying
Pros Cons
Buying • 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 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
• Build 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

Is buying cheaper than renting?

There are different costs associated with renting vs. buying, and they depend heavily on where you live and the local housing market. Using Bankrate’s rent vs. buy calculator can help you break down some of these expenses.

Most rental properties require a security deposit, for example, 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 if your monthly rent includes utilities such as water, electric, gas, cable or internet, and about how the security deposit will be held and whether it’ll accrue interest. Also, ask about how maintenance and repair requests are typically handled.

For homebuyers, one of the biggest costs of homeownership is your monthly mortgage payment, which includes the loan’s principal and interest. Your payments can go up or down over time if your loan is variable-rate or your property taxes or homeowners insurance premiums change.

Having a sizeable down payment — anywhere from 3 percent to 20 percent of the home’s purchase price — is expected. If you put less than 20 percent down, your lender will typically require you to purchase private mortgage insurance, or PMI, which drives up your monthly payments, too. With a lower down payment, your interest rate could be higher, too.

“During the [home-buying] 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,” explains Michelle Hopson, a Realtor with Compass, a real estate agency, in Dallas.

As a homeowner, be prepared as well for some of the hidden expenses that come with homeownership that catch many first-time homebuyers off guard and may lead to buyer’s remorse. Don’t leave yourself without cash in the bank after closing.

If you’re purchasing a property in a homeowners association, or HOA, you’ll also need to factor in monthly HOA dues, which can cover services like landscaping, exterior maintenance and community amenities.

Differences between renting vs. buying

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

Buying a house can build equity

While buying a home to live in shouldn’t be viewed strictly as an investment, homebuyers can capitalize on the equity their home accumulates over time. That means if the home’s value goes up, you’ll cash in on the higher value when you sell. Plus, with a fixed-rate mortgage, you won’t have to worry about rising rents.

“Interest rates are so low now,” Hopson says. “That means borrowing money is very inexpensive today. In Dallas, where rents are high, it can almost be as affordable to purchase as to rent in many parts of the city. If you can qualify for a home and build some equity, that ultimately makes more sense than renting.”

Tax implications

Another factor for buyers to consider is whether you will be able to deduct your mortgage interest at tax time. Tax laws allow those who itemize their taxes to write off their mortgage interest payments on loans up to $750,000; however, not everyone is eligible to itemize deductions, and changes to the tax laws in 2018 means that more people aren’t able to deduct as much of their mortgage interest and property taxes as they used to. Deductions shouldn’t be the sole deciding factor, however, because your rent could end up being the same or less than the after-tax cost of homeownership.

Home 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 like yard work, 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 if 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.

Is it better to rent or buy?

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

  1. What can you afford?
  2. 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.)
  3. Do you want stability or flexibility?
  4. Can you afford to be responsible for home repairs/maintenance?
  5. What are your financial, career and family goals (e.g., do you plan to relocate for work? Go back to school? Expand your family?)

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. 

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, as well.

“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, encouraging her clients to think ahead: “For clients who have a changing personal situation, such as getting married or planning to have a child soon, I encourage them 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.

“It may be better to wait or rent for a little while until [you] can afford the home [you] can live in for some time or grow into with [your] family,” Schanck says.

If you’re still unsure, it may be helpful to talk with a real estate agent to help you think through the decision to rent vs. buy a home.

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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
Mortgage editor
Reviewed by
President, Real Estate Solutions