Should you rent or buy a home?
Right now, the timeliness of this question couldn’t be more pertinent because you have to weigh all the factors when deciding! With interest rates being so high, you might be hesitant to buy. But if you rent, you may miss out on long-term capital gains.
Luckily, you came to the right place because today, we will help you weigh the pros and cons of renting or buying but also give you some other thoughts to consider!
Renting vs. Buying
Deciding whether to rent or buy is not a clear-cut process. Aside from deciding who to marry and when to have children, most adults will rank owning a home as one of their biggest decisions.
Taking on a mortgage payment is the most expensive line item on your budget each month and you are also committing for 15 to 30 years, depending on loan terms. On the other hand, if you think you are moving soon, you might want to rent.
Below is a list of what to know for each!
The Case for Renting a Home (Pros)
Are you a new graduate or brand new to an area? Or perhaps, you plan on changing your job very shortly. If any of these sound like you, renting might be your best option. Renting is generally regarded as the cheaper option (see this case study).
1. Property Taxes
One of my clients has a mortgage of about $1,600 but pays closer to $2,600 each month. The reason for this is that they have high property taxes and also homeowners insurance. Property taxes are something many will site as being a factor to rent vs. buy.
2. Down Payment
Coming up with a down payment is challenging for most people, and without putting down enough, you are forced to pay private mortgage insurance. With the accelerated housing market since 2020, 20% has become a sticking point for most homebuyers, making it a pro to rent if you don’t have the down payment.
3. No maintenance costs
A pro to renting is that you don’t have to worry about maintenance costs! AC unit goes out? The landlord takes care of it! Got an issue with the plumbing? Landlord’s responsibility. You quickly get the point, but the average homeowner should save approximately 2% of their home value each year for routine maintenance. But if you rent, you don’t have to worry about it!
Cons to Renting a Home:
Cons to renting a place instead of purchasing are as follows:
- You don’t own the home/housing you live in so you are spending money and not building equity
- Rent rates are increasing, and this makes it harder to save for the down payment
- You are at the mercy of someone else’s decisions
- You will need renter’s insurance
The Case for Buying (Pros)
You are ready to buy when you have your money in order. This is always the leading indicator when purchasing a new home, “Can I afford the purchase price?”
Homeownership is a fantastic feeling and accomplishment, but if you buy too soon or get in over your head, it will feel stressful. That said, the goal for almost all adults is to own a home.
Below, are some of the biggest reasons why owning is smart:
1. Mortgage Payments build equity:
Have you ever heard someone say they would instead buy because the monthly rent is just as much? While that can be an exaggerated statement at times, it is not far off, considering that median rent nationwide eclipsed $2,000 in the summer of 2022.
Interest hikes have scared some buyers away, but if you’re wondering if mortgage or rent payments are a better deal, you might be splitting hairs at that point. Unlike monthly rent, a mortgage payment counts towards building equity – something you can cash in on when you sell.
2. Homeowners insurance vs. Renters insurance:
You don’t have to have renter’s insurance when you own a home. Instead, you have homeowners insurance. However, with homeowners insurance, you have more options and you can use escrow for the payments.
3. Tax Deductions
On the one hand, you can argue that renting is a better deal because you don’t have to pay property taxes. However, homeowners can write off their mortgage payments interest – something a renter cannot.
In a sense, the Matthew Effect of economics is on full display because not only is your home gaining equity in most cases, but you can deduct a portion of your payments in the form of interest each year on your taxes.
4. Renovations & increasing home value
If you renovate the bathroom – you add home value. Fix the gutters or get a new roof? You can add value. Unlike a rental where you pay for the space, renovations can add value to your home, thus, increasing the home value and the ability to cash in down the road!
☑️ Related Read: 5 Emotional Benefits to Home Ownership
Cons to Buying a Home:
If there are pros, there are always cons, which is the case regarding home purchasing. Here are some of the quick cons to home ownership vs. renting!
- Buying a home means you are committed to that home through thick or thin. So you want to be sure when you buy your purchase in the right area.
- You will have more expenses as a homeowner vs. being a renter. Appliances, plumbing repairs, renovation costs, and so on can add up.
- You might have to pay mortgage insurance if you don’t have the correct down payment.
10 Factors to Consider for Renting or Buying:
Below is a list of factors you should consider before deciding to rent or buy.
Location
- Rent: If you are staying for only a few years or might change jobs, rent.
- Buy: If the place is growing and real estate is fast rising, try to buy in this area (Charlotte, NC for example)
Monthly expenses
- Rent: If you will pay 60% of your net income (or more) to a home, consider renting.
- Buy: If you can buy a home and not be house-broke, consider buying then.
Private mortgage insurance
- Rent: Private mortgage insurance might be a good reason to stick with renting over owning.
- Buy: You can refinance in a few years to get rid of PMI when you own.
Length of Stay
- Rent: It makes financial sense to rent if you will only be in an area for a few years.
- Buy: Paying rent in an area where you plan on staying long-term makes sense for maybe a year, but most will buy after that.
Down Payment
- Rent: A security deposit is cheaper than a down payment.
- Buy: The down payment will help you reduce your mortgage payments.
Maintenance costs
- Rent: Landlord pays.
- Buy: Homeowners pay.
Property taxes
- Rent: You don’t have to pay.
- Buy: You might have to pay depending on where you live.
Closing costs
- Rent: You don’t have to pay when you rent.
- Buy: You must pay closing costs when you buy a home or refinance.
Mortgage rate
- Rent: If the interest rate takes you out of your budget, you may consider renting.
- Buy: A good fixed-rate loan or knowing you will refinance in a few years is worth the opportunity cost.
Home’s purchase price
- Rent: Monthly costs are flexible when you rent based on your budget.
- Buy: You can determine if you buy based on projections for the home’s future value.
The Verdict – to Rent or Buy:
You should know which option is best for you and your needs. Both purchasing a home and renting can have pros and cons, depending on your current situation.
Before making your final decision, consider the following three steps:
- Make a list of your financials
- Create a list of wants vs. needs and also pros and cons
- Think about your long-term plans
Completing those three simple steps above and enacting some patience with yourself will help you make the right choice – whether that means buying or renting!
