Renting vs. Buying a Home: How to Decide in Four Steps

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If you’re like most people, you’ve probably come across a dream home or two while scrolling through Zillow or another listing site.

But there’s a lot of space between finding your dream home and deciding to make the move from renting to buying. Your finances, lifestyle, and future plans are among the many factors to consider before deciding what makes sense for you. And in the middle of the current red-hot housing market, it’s even more complicated.

At the end of the day, if homeownership makes sense to you financially and personally, there are good reasons to buy. “One of the biggest ways of building wealth is through homeownership,” says Dr. Vivek Sah, director of the Lied Center for Real Estate at the University of Nevada, Las Vegas.

Here’s what you should consider before buying a home: 

Pros and Cons of Renting

The biggest draw of renting over buying is the lack of commitment — you can move whenever you want, maintenance and repairs aren’t your responsibility, and you’re not tied down by a mortgage. The flip side of this, though, is that you don’t truly have a stake in your residence. You can’t build home equity, your monthly rent is controlled by someone else and could change at any time, and you typically can’t make any major modifications to your home. Because of this, renting is great for those who aren’t quite ready to settle down into a house long-term. 

Pros

  • Easier to travel or move around frequently

  • Do not have to pay homeowner’s insurance, property taxes, or homeowners’ association fees

  • Most home maintenance and repairs are paid for and handled by your landlord

Cons

  • Can’t build wealth through home equity

  • Typically can’t make major renovations or modifications to your residence

  • Rent prices are out of your control and may change

Pros and Cons of Homebuying

When you buy a house and build home equity, you have a stake in something that’s truly yours. That can be highly rewarding and provide a means to build generational wealth, but it comes with certain expenses and responsibilities that not everyone may want or be ready for. You’ll have to take care of repairs and maintenance on your own, pay any property taxes and fees, and stay in your new house long enough to recoup the upfront costs. And in this current environment, buying a house also means navigating the highly competitive housing market, which can be difficult, stressful, and time-consuming. But if you’re ready for the commitment and can afford the costs, homeownership can be a worthwhile investment for years to come. 

Pros

  • You can build wealth through home equity

  • Mortgage interest rates are comparatively low right now, meaning that in certain cases, monthly mortgage payments may cost the same as rent

  • Freedom to renovate and modify your house as you see fit

Cons

  • Less flexibility to move or travel frequently

  • May be hard to get your offer accepted in this current competitive market without going significantly over asking price

  • Need to manage and pay for home expenses like repairs, maintenance, property taxes, homeowners’ association fees, private mortgage insurance, and homeowners insurance

If you’re still not sure if you should rent or buy a house, asking these four questions can help you decide:

1. How Long Do You Plan to Stay?

Buying a home is usually only a good idea if you’re planning to stay put for at least three years, says Sah. With the value of homes only increasing by 4 to 7.5% per year, you could pay more in closing costs than you’d earn in proceeds if you sell after only a year or two. Also, you could owe capital gains tax if you sell a home you’ve owned for less than two years.

You should also think about how much space you’ll need in the future if you plan to start a family or anticipate relatives moving in with you. A one-bedroom condo might not fit your lifestyle in a few years, so thinking through your plans and timeline can help you figure out when and what to buy. 

For people who aren’t sure they’ll stay in one spot for more than a few years, such as students or people who just want to try out a new neighborhood, renting makes more sense than buying, says Virginia Gilmartin, manager of homeownership services at Urban Edge Housing Corporation, a Boston-area housing organization.

2. Have You Saved Enough to Buy a Home?

If someone can commit to staying put for at least a few years, Sah’s next question would be: “Do you have enough savings to buy a house?” He recommends having at least 20% of the price of the home saved up for the down payment. That way, he says, it will be easier for you to prequalify for a loan and you won’t need to get mortgage insurance

But if you don’t have that much saved up, don’t just give up. “We don’t rush people into buying, particularly if they need to work on their credit and savings,” Gilmartin says. “We try to explain that it might make sense for people to continue to rent for 6, 12, or even 18 months and work on savings and credit … because the best mortgage products go to those with the best credit scores and down payments.” 

Pro Tip

Housing counselors can help you figure out if buying a home makes sense for you. Unlike real estate agents or mortgage lenders, housing counselors don’t profit when you purchase a house.

If you think it makes sense for your situation to buy before saving up for a 20% down payment, a first time homebuyer grant or program could be an option worth looking into. Some buyers might also qualify for government-backed loans through the Federal Housing Authority, Department of Veterans Affairs, and U.S. Department of Agriculture.

Some of these programs only require a 3-5% down payment and also can help with closing costs, Gilmartin says. “We encourage people to have skin in the game, practice saving, and understand that their down payment is instant equity in the property that they’re buying.” 

Working with a housing counselor can help you figure out if you’re financially ready to buy a home, and they can help you find a down payment assistance program. Unlike a real estate agent or mortgage lender, housing counselors don’t profit when you purchase a house. Many are free or inexpensive to work with, and operate with certification and oversight by the U.S. Department of Housing and Urban Development (HUD). 

It’s worth noting that in the current seller’s market, many homes are selling for far above asking price as buyers compete with each other. Even if you’ve been saving for a house for some time, you may find yourself needing to re-adjust your budget for how much house you can afford to take into account heightened housing prices.

3. Can You Afford All the Extra Costs of Homeownership?

For many people, monthly mortgage payments can be less than monthly rent. In places where rent is particularly expensive, “it really does make sense to at least entertain and investigate the idea of becoming a homeowner,” says Gilmartin.

But your calculations shouldn’t stop at comparing rent and mortgage payments, because “those are not apples to apples,” says Sah. There are other costs associated with homeownership to consider, such as closing costs, insurance, property taxes, homeowner’s association fees, and maintenance.

“So many people will purchase a property and use every last cent they have … and because they used all of their money for the down payment and closing costs, they have nothing to keep up the home, and that becomes a pretty dire situation,” says Denise Supplee, co-founder and real estate investment educator for SparkRental, a rental resource and software service site. 

If you’re able to plan for these additional expenses, building equity in your own home offers long-term rewards you won’t get with renting. “Every month that you’re paying rent, you’re paying someone else’s mortgage,” says Gilmartin. And there are other benefits to owning, such as being able to deduct interest paid on a mortgage come tax time.

4. Are You Ready to Be a Homeowner?

Even if you can afford to buy, renting might be a better option based on your lifestyle and goals.

Again, if you plan to travel around and move frequently, you’re better off renting. Renting is also a good option if you’re not interested in maintaining a home. Homeownership can be a lot of work and when something breaks, it’s on you to fix it. There’s no landlord to call when your name is on the deed. 

However, owning a house means you can personalize it to make it a home. You can paint the walls, knock out the kitchen cabinets, and retile your shower if you want to. So you’ll need to weigh the hassles you’ll have to deal as a homeowner against the personalized touches and upgrades you’ll be clear to do in a home you own.

And if you’re not sure, waiting and saving will only put you in a better position to buy in the future.

Bottom Line

Figuring out whether to buy or rent is a financial decision with many factors and long-term consequences. And right now, low mortgage rates, a competitive housing market, and the changing nature of work and location requirements all serve to complicate the decision further. 

Thinking through how long you plan to stay in your next place and what your savings and budget for unexpected expenses look like can help you figure out whether it makes sense to rent or buy your next home.

Homeownership may be the classic “American dream,” that doesn’t mean it’s the right decision for everybody, at every moment. Whether you take the plunge on buying a home or continue to rent, make sure you’re picking the option that best serves your goals and financial situation.