There’s no doubt that buying a home is a major life decision, but is it right for you? Of course, there’s no single correct answer, as there are pros and cons to both renting and buying. A major factor in anyone’s decision-making process, though, is one’s personal finances. In most cases, renting seems to be the more affordable option.
However, that’s not always the case. Your decision can boil down to several lifestyle considerations such as whether you want flexibility or stability, what your career goals are and whether you want a place to truly call your own.
If you’re on the fence about whether you should rent or buy, read on to find out what you need to consider before taking the plunge.
Renting Vs. Buying A House: Pros And Cons
Aside from your personal situation, there are some objective benefits and drawbacks to renting and buying that will exist in most scenarios.
Renting Pros And Cons
Pros
- Mobility/freedom to move around
- Landlord pays for maintenance
- Doesn’t require expensive closing costs
- No fluctuation in monthly housing expenses
- Allows you to test-drive different living spaces
Cons
- You don’t build any equity
- Limited ability to customize your living space
- Rent could go up over time
- Landlord might sell or decide to stop renting
- Limited sense of home stability/permanence
Buying Pros And Cons
Pros
- You build equity over time
- Home value may increase over time
- You may reap tax benefits
- Unlimited freedom to customize your living space
- Sense of home stability/permanence
Cons
- Closing costs can be prohibitive
- Responsibility for maintenance and repairs which requires time and effort
- Less flexibility to move (at greater difficulty/expense)
- Home value may decrease
- Recent tax laws could hamper tax benefits
Rent Or Buy: 5 Steps To Making Your Decision
1. Decide How Long You Plan To Live In The Same Place
If you feel certain you’ll stay in a home for at least 5 years, buying a home could make sense. That’s because it could be a good fit both financially and emotionally – you can put personal touches on your home and really make it feel like it’s yours.
However, renting is the better option if you prefer to be more nomadic. For example, let’s say you’re really hoping to get that job promotion – but it’s halfway across the country. You don’t want to have to deal with the hassle of selling a home while transitioning to a new position. Or perhaps you’ve moved to a new area and want some time to get to know different neighborhoods before settling down somewhere.
Sure, you can buy a home and then sell it within a few years, but the costs are hardly worth it. Aside from initial closing and moving costs, you may be paying more closing costs when selling a home in addition to other costs such as repairs and renovations that would make the house sell for top dollar.
2. Estimate The Cost Of Renting Vs. Buying
In many cases, renting can be cheaper than buying a home because of the upfront costs involved. This includes a down payment, closing costs, moving costs, any renovations and other home maintenance tasks.
That said, just because you can afford a mortgage payment doesn’t mean you can afford a home; expenses add up. In addition to a monthly payment that’s more than the principal and interest on your mortgage, you’ll also have property taxes, homeowners insurance and (in many cases) mortgage insurance as well as homeowners association fees.
On the other hand, buying a home can be cheaper in the long run and it offers you an opportunity to build equity. (Hopefully, your home will increase in value when you sell the home.) In most areas of the U.S., buying a home is actually cheaper according to a National Association of REALTORS® report that shows that after 6 years a homeowners mortgage payment is lower than that of a renter. This is assuming the rent has a 5% increase each year and the homeowner is paying a fixed monthly payment.
3. Mobility Vs. Putting Down Roots: Which Is More Important To You?
As cliché as it sounds, life happens. Even with the best of intentions, it’s hard to predict what can happen next. If you intend to stay in one place for a long time and have the financial means to do so, buying a home may make the most sense.
However, it’s important to take a look at your current life situation and think about whether or not it’ll change within the next few years. Because if it does, your housing needs could also change (i.e., you may want to hold off on buying a home).
For example, you and your long-term partner may have just gotten engaged and plan on getting married in the next 2 years. In this case, buying may not make sense. Maybe you two want to figure out how to combine your finances and work out your budgeting routine before adding a home into the mix.
Or let’s say you and your spouse just got married and you aren’t sure if you want to start a family quite yet. If you have any inklings that you might want to have children soon, you shouldn’t buy a home that’s not going to accommodate a growing family in a few years.
In both these cases, it might be a good idea to rent for the time being so you have time to figure out what you want in a home, what your budgeting needs are and what kind of home might be the best fit for the lifestyle you hope to have in the future.
4. Weigh The Risks Of Renting And Buying
As mentioned above, there are risks for both renting and buying a home. Although you can build equity when buying a home, there are some financial risks. For one, you could lose money if there’s a downturn in your local real estate market. Or, if you sell your home sooner than you want, you may not be able to make up for what you spent in closing costs or renovations.
Let’s not forget maintenance costs. These are expenses you’ll need to pay to keep the home in top condition. Think checking air filters and vents, testing fire alarms, landscaping and fixing plumbing issues, among other things.
If you’re focused on other life goals, like a career that requires you to travel often, or if you have multiple young children to attend to, adding home maintenance to your list of responsibilities may not be the best choice.
On the flip side, renting means you won’t have the opportunity to build equity like you would with buying. Your rent could go up at any given moment. You’re also at the mercy of your landlord, such as being asked to move out or having to deal with maintenance requests being deferred.
5. Assess Your Financial Situation
It’s important to note that you need to be realistic about your financial situation when deciding between renting and buying. Once you estimate the costs of renting versus buying, be honest about whether you can afford other upfront costs like a down payment, repairs, moving costs and buying new furniture. Consider using a mortgage calculator to estimate your monthly payments as well as how much home you can afford.
In either case, do some careful budgeting right now so no matter what you choose you’ll be able to afford a home or rent.
How To Calculate Renting Vs. Buying A Home
Whether you would save more by renting or buying can depend on a few key factors. One is your location and the prices of other homes or rentals in your area. Next you need to consider your credit score and if a lender would find you creditworthy. After factoring in a home’s purchase price, down payment and closing costs, as well as a monthly mortgage cost, compare that to the monthly cost of rent and subsequent assumed costs over a period of time. You’ll be able to see the differences between costs as well as the perceived equity you would’ve built up in a home.
Final Thoughts
There isn’t always a clear answer to the question of whether to rent or buy. Depending on your life situation and finances, the answer might change over time. There are other options, such as rent-to-own property, where you start out renting then move onto becoming a homeowner. No matter what decision you make, it’s crucial that it’s an informed one based on your financial situation and lifestyle.