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

Images by Shutterstock/Illustration by Bankrate

Renting vs. buying a home is a big decision. 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. However, 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

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 if your monthly rent includes utilities such as water, electric, gas, cable or internet. Also, inquire about how the security deposit will be held and if it’ll accrue interest.

For homebuyers, one of the biggest costs of homeownership is the monthly mortgage payment. It includes principal and interest for 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, a real estate agency, in Dallas.

Having a large down payment — 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 could 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 renting vs. buying

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.

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 (or the difference between the home’s value and 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 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.”

But a home purchase is a big commitment, and you likely won’t accumulate a large amount of equity right away unless the housing market skyrockets. Instead, you’ll build equity as you make monthly payments and reduce your outstanding mortgage balance over time. If you decide to sell in the first few years, you may not receive this benefit.

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 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.

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.

Should I rent or buy a house?

The answer to the rent vs. buy debate isn’t so cut and dried. Here are five 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 (e.g., 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.

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.

The bottom line

Ultimately, deciding between renting vs. 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 that can help you weigh your options and make an informed decision.