Renting vs. buying a home is a big decision, and there are pros and cons to each option. In fact, a higher percentage of U.S. households are renting than at any point since 1965, according to a Pew Research Center analysis of U.S. Census Bureau data released in 2016.
For some people, renting comes down to what they can afford at the moment.
“I was a long-term renter because I wanted to wait to buy until I could afford to stay in my current neighborhood,” says Atlanta resident Jennifer Walker, a public relations executive who bought her first home this spring. “I didn’t realize that there were affordable options.”
For Walker and other aspiring homebuyers, working with a savvy real estate agent and lender can help them realize they’re ready to take the plunge.
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:
- What can you afford?
- How long do you plan to stay in the home?
- Do you want stability or flexibility?
- Can you afford to be responsible for home repairs/maintenance?
- What are your financial, career and family goals?
Renting vs. buying a house: Calculating the costs
There are different costs associated with renting and buying. Using Bankrate’s rent vs. buy calculator helps you break down some 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 if your monthly rent includes utilities, such as water, electric, gas, cable or internet.
For homebuyers, one of the biggest ongoing costs of homeownership is your monthly mortgage payment, which includes the loan’s principal and interest amounts. Your payments can go up or down over time if your loan is variable rate or your property taxes and homeowners insurance premiums change. 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.
Be prepared for some of the hidden expenses that come with homeownership that catch many first-time homebuyers off guard and can lead to buyer’s remorse.
“During the 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 sales agent with Compass Real Estate in Dallas.
Having a sizeable down payment — anywhere from 3 percent to 20 percent of the home’s purchase price — is expected. If you’re purchasing a property in a homeowner’s association, or HOA, you’ll need to factor in monthly HOA dues, which can cover services like landscaping, exterior maintenance and community amenities.
Differences between renting vs. buying
Renting vs. buying a home isn’t a matter of ownership. Here are other key differences between the two options.
- Buying a house can build equity
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 the mortgage interest at tax time. Tax laws allow those who itemize their taxes to write off their mortgage interest payments. However, not everyone is eligible to itemize deductions, and changes to the tax laws in 2018 means that more people won’t be able to deduct as much of their mortgage interest and property taxes as they used to.
- 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 they can add up fast.
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. She encourages buyers to carefully review the seller’s disclosure and get a home inspection to be aware of potential red flags.
- Want flexibility? Rent
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.
Consider your life stage and goals
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, 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,” she says. 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?
“It may be better to wait or rent for a little while until they can afford the home they can live in for some time or grow into with their family,” Schanck says.
Bottom line: Choose what’s right for you
It may be helpful to talk with a trusted real estate agent to help you think through the decision to rent vs. buy a home. Here’s a list of pros and cons to help you on your way.
Renting vs. buying a home: A comparison
- 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 up front
- 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
- 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