Renting vs Buying: Which Option Is Right for You?

To some, the dream of homeownership symbolizes stability, family life and an abode they can make their own. To others, renting means freedom to roam and passing over maintenance and repair duties to someone else. There is no right answer, but there is a right answer for you.

Renting vs. buying a home: Key differences

So is renting or buying better? While it largely boils down to finances and affordability, personal goals and choice, preferences, and lifestyle, there are key differences between renting and buying a home. Let's take a look.

Renting

What are the downsides to renting?

• Not building equity. When you rent, you are spending money on something that isn't helping you build equity, and you won’t own the space outright one day.
• Rent price isn't fixed. Your rent payments are subject to increase. If you live in a rent-controlled building, there's a cap as to how much your rent can go up each year. That being said, unlike when you own your home, your landlord has the power to bump up your rent.
• Repairs and upkeep are out of your hands. Should you suffer a leaky faucet or mold on your bathroom ceiling, you may have to wait for your landlord or property management company to take action and make the repairs. Furthermore, the structural condition and general appearance of your rental unit and building are at the mercy of your landlord.
• No tax benefits. You won't get to enjoy any tax benefits by renting.
• Restrictions on modifications. Because it's not your property, there are limits as to what you can and can't change in your home. For instance, you might be able to paint the walls, and hang paintings, but you'll essentially need to leave the place in the same condition you found it in.
• Potentially no pets allowed. If you're a pet lover and pet parent, you might have a harder time finding a place to rent with your cat or chinchilla. Not all rentals allow pets.

Here are some advantages to renting:

• It’s sometimes cheaper. Your monthly rent payment may be more or less than a mortgage payment, but you won’t be on the hook for maintenance, repairs and upkeep.
• Freedom and flexibility. Whereas with a home you might feel tethered to a permanent space, you can more easily uproot and move to new stomping grounds, as soon as your lease is up. If your financial situation changes, you can downsize to a smaller space to save money. That is harder to do when you own a home.
• No down payment. When you move to a new apartment, besides your deposit, you aren't required to pony up a down payment or closing costs.

Owning

Here are some downsides to homeownership:

• High upfront costs. If you want to be a homeowner, unless you have the funds to pay for it outright, you'll need to have enough to save for a down payment and closing costs. The minimum down payment depends on the type of loan. For instance, the minimum down payment for a Federal Housing Administration loan is 3.5% of the total loan amount.
• Insurance and taxes. Homeownership means paying insurance and taxes. While the exact price tag depends on factors such as location, housing, and coverage, the average homeowners insurance policy in the U.S. is $1,899 with $300,000 dwelling coverage (according to PolicyGenius). You're on the hook for private mortgage insurance if you put less than 20% down on a conventional loan.
• Maintenance and repairs. When you own a home, maintaining your abode falls entirely in your hands. How much you'll need to invest to maintain your home depends on its condition.
• Depreciation. If you don’t spend money to maintain your home, there a chance the value of your home won’t appreciate over time.

Here are some pros to homeownership:

• Fixed monthly payments. If you have a fixed rate mortgage, your payments will be the same throughout the life of your loan.

• Tax benefits. Homeownership comes with some tax breaks including breaks on your mortgage interest and property taxes.
• You build equity. As you pay off your home loan, your equity in your house increases. That's equity you can cash out on when you sell or do a cash-out refinance. You can also tap into your home's equity with a home equity loan or home equity line of credit (HELOC).
• Tailor it to your liking. Because you own your abode, you can modify it, renovate to your taste, or even demolish and rebuild if you want to.

To rent or buy: How to decide which is right for you

Here are some questions you'll want to ask yourself to decide whether renting or buying is right for you.

• What's your monthly budget for housing? 
• How do you feel about a long-term investment? 
• What are the most important features and amenities in a home? 
• How long do you plan to stay in the home? Is it more or less than five years?
• Would you prefer a more permanent, fixed situation, or a more flexible one? 
• Can you afford to repair and maintain a home? 
• What are your short-term and long-term personal, professional, and financial goals?
• Where do you want to live? Is the neighborhood a place you can afford to buy?

Which is more cost-effective, renting or buying? 

Let’s say you have two options on the same place: you can either buy it from the current owner or rent it. To figure out whether buying or renting is more cost-effective, you could look at what your monthly mortgage payment will be plus a fixed estimate of your yearly maintenance costs and taxes and compare that to what you’d pay in rent. If your rent is below your ownership costs, and you could invest the difference in stocks and bonds, it might make more sense to rent. On the other hand, if the properties in the area you’re shopping in are likely to appreciate significantly, it might make more sense to buy.

While there are distinct advantages and downsides to both renting versus buying, the decision largely boils down to your financial situation, preferences, lifestyle, and personal and professional goals. It's also a good idea to see which is more cost-effective and when it makes more financial sense to buy versus rent, and vice versa.

Frequently asked questions (FAQs)

How can I save money to buy a house while paying for rent?

First, you'll want to zero in on roughly how much you'll want to save for a down payment. To save to buy a house while juggling rent payments, bolster your income by taking on side gigs, taking on more work at your day job, and seeing if you qualify for overtime. See if there's any way you qualify for a bonus or promotion.

You can also save by cutting back on the three major expenses—food, housing, and transportation. For instance, move to a more affordable neighborhood, get a roommate, eat out and get less food delivery.

Is it a good financial decision to pay more than 30% of my income on rent?

It's a general rule of thumb to spend no more than 30% of your gross income (aka income before taxes and other deductions) on your housing. That being said, it's not a hard-and-fast rule.

For instance, if you live in a more expensive part of the country, like in New York City or San Francisco, you might find yourself spending upward of 50% of your income toward rent. But if you're in more affordable stomping grounds, then 15% of your income might be more the norm. The main thing is to keep your housing affordable so it doesn't eat up too much of your cash flow.

What is the average down payment on a house?

The average down payment for a house is 20%, though there are some exceptions. For example, if you have an FHA loan or veteran’s home loan, you may be able to put down 10% or less.

What are current mortgage rates?

Between 2008 and 2020, mortgage rates were generally between 4% and 6%. During the pandemic, interest rates plummeted, but since spring of 2022, they have crept up to levels not seen since the George W. Bush administration. Now they are in the range of 5% to 7%. Rates change often, so check your local mortgage lender or use our tool below for your best current rate.