Renting vs. buying a house

Renting vs. buying a house: Pros and cons

Choosing between renting and buying a home is a big decision with regard to finances and commitment. It’s important to consider the pros and cons of each as you decide which best fits your current situation as well as your future goals.

Renting

For many people, renting is a more realistic option than buying — especially in the early years of adulthood. The flexibility is a perk, but renting has some potential disadvantages, depending on your goals.

Pros

• Accommodates short-term housing situations: Renting may be ideal if you’re looking to stay in a place temporarily. It also might make sense if you’re new to an area and want to explore before you commit to buying.
• Low to no repair and maintenance costs: Renters may be responsible for small repairs, but they’re not responsible for the big ones, like fixing household systems or construction.
• Affordable housing in desirable areas: Often, renting lets you live in an area that’s close to your work, your kids’ school or the shops and restaurants you like to visit. In high-demand areas, the upfront cost of buying can be too costly for the average family.
• Renters insurance is relatively inexpensive: It can be a good idea to get a renters insurance policy to cover your personal belongings in the event of a disaster. Renters insurance policies are pretty affordable — about $17 a month on average. (Homeowners insurance averages about $1,250 a year).

Cons

• Payments are likely to increase over time: At the end of a lease, it’s typical to see rent increase for renewal or the next tenant. Economic conditions and housing market trends can have big effects on these payments.
• No equity: Renting means you have no ownership in the home, which also means you don’t build equity with each payment. You’re paying to live in a property for a certain period without gaining a stake in it.
• Extra fees and charges: You may have to pay extra fees to your landlord for pets or maintenance. You’ll also have to make a security deposit when you first rent a home (often one month’s rent).
• Not tax deductible: Unlike mortgage interest, rent is not a tax-deductible expense, so your payments won’t lower your taxes.
• Not reported to credit bureaus: Because rent isn’t considered a debt payment, the on-time payments you make to your landlord won’t help you boost your credit score (unless you sign up for a rent reporting service).

Buying

Even if you choose to rent for a few years to save some money and decide where you want to put down roots, you may still have a goal of homeownership. With a mortgage, you’ll know what you’re getting into in terms of payments and expectations, but there are some potential downsides to consider.

Pros

• Ownership in the property: Equity is your ownership stake in the property. Every mortgage payment you make contributes to building your equity until the loan is paid off and the home is 100% yours. Even if you sell your home before it’s paid off, you can cash out your equity and use it as a down payment on the next home.
• Investment typically grows in value: Homes are considered one of the safest investments because they tend to appreciate in value over time. According to the Federal Reserve Bank of St. Louis, the average home sales price at the end of 2021 was $477,900 — an increase from the average price of $364,900 five years earlier.
• Tax deduction: The mortgage interest you pay each month to your lender is considered a tax-deductible expense, which means it decreases your income tax liability. This can help you save in taxes as you work to pay off your mortgage loan.
• Ability to make changes to the home: Unlike with renting, you won’t need permission to change a paint color or swap out the carpet for hardwood floors — though if you’re part of a homeowners association, note that there may be rules concerning what changes you can make. Some work may also require a permit from the local authority.
• Fixed payments: If you get a fixed-rate mortgage, your monthly payments won’t change during the course of the loan. If interest rates rise, you’ll still be locked in to your initial rate.
• Payments build credit: Lenders report debt payments to the credit bureaus, so paying your mortgage on time each month can help improve your credit score.

Cons

• High upfront costs: If you want to buy a home, you’ll need some cash to provide a down payment for the mortgage. Many lenders have a minimum requirement of 3%, though others may require more. Some government-insured home loans are available with no down payment. You’ll also have to pay closing costs, which can account for 2% to 5% of the home’s sale price.
• Responsibility for maintenance and repairs: All responsibility for repairs falls on the homeowner — so if your air conditioner dies in the heat of the summer, you could be stuck paying for a whole new unit.
• Additional monthly expenses: Typically, there are monthly expenses beyond your mortgage, like homeowners insurance and mortgage insurance. You also have to pay property taxes each year.
• Selling is costly and complicated: Packing up and moving isn’t as easy as it is when you rent. If you decide you want to buy a home in a different neighborhood, for instance, you’ll have to sort out selling (or renting out) your current home. Closing can be a time-consuming process, usually taking about 30 to 60 days.
• Home value subject to market conditions: While home value does tend to increase over time, there are occasional lulls in the housing market that result in dropped prices. If you need to sell your home during such a dip, you could lose money on your investment (depending on how much you bought the home for).

Is a mortgage cheaper than rent?

Mortgage and rent costs vary based on multiple factors, including location. In big cities like Los Angeles, where home prices are high, it may be cheaper to rent. Supply and demand also influence prices. If there aren’t many homes on the market and the demand to buy is high (in other words, it’s a seller’s market), both rent and home sale prices may increase.

Your individual financial situation can also impact the cost of housing. If you have good credit and the cash available for a down payment, you’re more likely to secure a mortgage with a low interest rate, which could result in a more affordable monthly expense than a rental would offer.

Even if a mortgage would be more affordable than rent, there are other costs associated with homeownership to consider.

In general, though, homeownership tends to have higher overall costs than renting. Not only do you have a mortgage payment each month, but you also have to be prepared for both expected and unexpected expenses — it’s smart to set aside 1% to 4% of the value of your home annually for maintenance and household repairs.

Is renting “throwing money away”?

It’s true that renting is putting money toward something that you won’t ultimately own, but it’s not necessarily wasteful — it may be the best housing option for your situation. Often (like in big cities), renting is more affordable than buying. It also provides flexibility you don’t get as a homeowner. For some, it’s nice to know it’s easy to pack up and move each year.

Even if your long-term goal is homeownership, renting can be a step toward that goal. For instance, it might make sense to rent a smaller home or apartment for a short time while you save money for a down payment.

Bottom line

Ultimately, you’ll want to think about your short- and long-term housing and financial goals when deciding between renting and buying. It may make sense to rent a home if your job situation is unstable, for instance. Despite the flexibility of renting, though, rental payments generally go up over time — so it’s good to be prepared for this possibility once your lease is up.

On the other hand, homeownership builds equity, and it’s an investment in an asset that tends to increase in value over time. It may make sense to buy if your income is steady and you plan to live in a particular area for at least five years. Keep in mind that a mortgage usually requires a cash down payment and good credit to qualify, however — if you don’t have either, it may be best to rent while you save and build on your score.