For many, buying a home is the quintessential symbol of achieving the American dream -- the result of years of working hard and saving money while building credit. But don’t let the pressure, or promise, of becoming a homeowner preclude you from considering renting a home. Renting offers a number of benefits, such as greater flexibility and fewer responsibilities.
Homeownership is one of the best ways to build long-term equity through property value appreciation, but the upfront costs are much greater than signing a new lease on an apartment.
Whether you’re looking to rent or buy, housing is most likely your largest monthly expense. The most important thing is to know your number: What can you comfortably afford to spend each month on housing? Depending on your financial situation and lifestyle, that may be 30% of your gross monthly income, or closer to 40% if you live in a high-cost metropolitan city such as New York City or Los Angeles.
“Ultimately, the decision to rent or buy should be based on your personal financial situation and goals,” said Adie Kriegstein, licensed real estate salesperson at Compass. “Don’t rush into anything without doing your research and weighing the pros and cons.”
Renting vs. owning: What are the differences?
Renting versus owning a home is a personal decision that comes with knowing your long-term financial goals and how much flexibility you want to build into your lifestyle. Taking the time to assess your options is critical.
Although homeownership is a great way to build long-term equity, it’s also a great way to take advantage of tax benefits not available to renters, such as mortgage interest and property tax deductions. But, the upfront costs are much greater than signing a new lease on an apartment, taking into account a down payment of between 3% and 20% of the home’s value, plus closing costs ranging from 3% to 6% of the purchase price.
Becoming a homeowner also gives you greater responsibility when it comes to managing your finances. For example, as a homeowner, you need to have enough money to cover unexpected repairs and ongoing upkeep, expenses that a landlord is responsible for if you’re renting.
What’s more, if life offers an unexpected reason to move, a homeowner must either put their home back on the market or find tenants to cover the mortgage. A renter, however, can simply let their lease expire.
Renting, on the other hand, has fewer upfront costs and more flexibility. The biggest downside is that renters don’t have a stake in something that’s truly theirs. Each time you pay rent, it isn’t contributing to your equity, just to your landlord.
“Homeownership provides a sense of permanence and stability that renting cannot offer. It also allows one to build equity and create a long-term investment,” Kriegstein said.
Despite these motivations, the high cost of ownership remains a major obstacle for many renters eager to purchase a home.
Rent vs. buy: Understanding the pros and cons
Renting a home
When it comes to renting, the biggest draw over buying is the lack of commitment. You have the flexibility to move whenever you want (if you’re willing to break a lease), you’re not responsible for maintenance and repairs and you’re not tied down to the terms of a mortgage.
The flip side, however, is that you don’t truly have a stake in your residence. Your monthly rent is controlled by someone else and can change at any time.
But on a general level, renting is ideal for those who aren’t ready to commit to a house long-term.
| Pro | Con |
| Flexibility to move; no long-term commitment or being tied to a mortgage | Can’t build wealth through home equity |
| Don’t have to pay expenses like homeowners insurance, property taxes or homeowners association fees | You can’t make major renovations or modifications to your residence |
| No down payment | Rent prices are out of your control and may change |
| No tax benefits |
“Renters get to live their lives without worrying about the costs and responsibilities associated with maintaining a home,” said Andrew Delbridge, chief revenue officer at Rhino, a security deposit insurance company. “From landscaping to plumbing and infrastructure upkeep, everything is covered by the owner, including property taxes.”
Buying a home
One of the main advantages of buying a house is the opportunity to build generational wealth through home equity. But, it comes with expenses and responsibilities that not everyone is ready to handle.
| Pro | Con |
| You can build wealth through home equity | Less flexibility to move frequently |
| Freedom to renovate and modify your house as you see fit | Need to manage and pay for home expenses such as repairs, maintenance, property taxes, homeowners association fees, and both mortgage and homeowners insurance |
| Opportunity for tax benefits | Hefty upfront cost in the form of a down payment and closing costs |
Homeownership can be highly rewarding on both personal and financial levels, but you’ll have to stay in the house long enough to recoup the upfront costs. Plus, you’ll be on the hook for any repairs and maintenance, and that’s in addition to any property taxes and fees associated with your home.
But, homeownership offers opportunities in the form of tax benefits. You can, for example, deduct home mortgage interest by up to $750,000 if filing jointly ($500,000 if you are married, filing separately) from your annual income taxes, according to IRS Publication 936. Homeowners can also deduct up to $10,000 of property taxes if filing jointly, or $5,000 if filing individually.
If you’re ready for the commitment, and can afford the costs, then homeownership can be a great investment for many years to come.
“Real estate traditionally appreciates at least 3.5% annually, and as the homeowner, that all comes back to you and not your landlord,” said Alix Nadi, team leader of the Alix Nadi Team at Re/Max Around Atlanta Realty.
But in the current housing market, buyers are faced with a double whammy: elevated mortgage rates and stubbornly high home prices.
During the pandemic, Mountain West markets, which include such cities as Boise, Idaho and Las Vegas, saw some of the nation’s steepest home price increases. A massive influx of buyers, low mortgage rates and stunted inventory allowed those prices to climb virtually unchecked. Today, prices are slowly coming down in some areas, but not enough to offset the burden of mortgage rates.
Higher rates don’t just decrease home-buying power, they also have an impact on inventory levels. With many homeowners reluctant to let go of their bargain-bin mortgage rates, many of which are below current market values, real estate inventory is dwindling.
The average number of new listings, for example, was down 25% from last May, according to real estate brokerage Redfin.
The housing market is still reeling from a tumultuous few years and it’s unlikely that mortgage rates will drop dramatically anytime soon. You may need to put your home buying plans on hold for a few months, but your best recourse may be to adjust your expectations -- whether that’s looking for houses in a different area or sticking with renting.
“It’s easy to fall into the trap of thinking that homeownership is a logical step up from renting, but that’s an outdated perspective,” Delbridge said. “With the 30-year fixed rate at more than double what it was two years ago, buying a home may not be in many families’ best interests,” he added.
Cost of renting vs. buying a home
Purchasing a home comes with far more upfront costs than renting, but you’re able to recoup those costs if you stay in your house long enough and if home values appreciate over time. When you rent a property, you don’t have to worry about budgeting for maintenance or property taxes, but your landlord can adjust your rent at any time if the property isn’t rent-controlled.
Whether it’s more expensive to rent or buy depends largely on where you live and what’s going on in the local housing market. But, you’ll want a true apples-to-apples comparison of those costs to make the best decision for your budget.
“As a homebuyer, you’ll want to have a certain level of comfort in understanding your monthly mortgage payments,” said Shelby McDaniels, national director of business development for home lending at Chase Home Lending. “But it’s also important to factor in the additional expenses above and beyond your mortgage. This can include everything from inspections and repairs to property taxes and insurance.”
Do the math to see what you can afford. And if it doesn’t work out, don’t rush into a bad financial decision for fear of missing out.
These are some of the standard expenses you can expect to pay if you’re purchasing a house:
- Down payment: A typical down payment will range from 3% to 20% of the home’s purchase price.
- Closing costs: Homebuyers can expect to pay 3% to 6% of the home’s purchase price on closing costs.
- Monthly mortgage payment: Your monthly mortgage payment will include principal and interest for the loan, which can fluctuate over time if you have a variable interest rate mortgage.
- Private mortgage insurance, or PMI: If your down payment is less than 20% of the home’s purchase price, you’ll likely need PMI, which increases your monthly mortgage payment. A lower down payment could also result in a higher interest rate on your mortgage.
- Homeowners association, or HOA, dues: If you’re purchasing a home in a HOA, you’ll need to factor in monthly HOA dues. Your dues will generally cover landscaping, exterior maintenance and community amenities
- Homeowner’s insurance: This type of insurance covers damage to your house, property and other assets in your home. Most, if not all, mortgage lenders will want your home to be covered by insurance. The cost to insure may be higher if you live in a state that is prone to natural disasters, such as wildfires, flooding or tornadoes.
- Property taxes: These taxes will vary depending on where you live, but can be 0.5% to 1% of the value of your home.
Maintenance and other hidden fees: When you rent, you’re off the hook for any maintenance or repairs your property needs. (Your landlord’s on the hook for those fees.) Homeowners, on the other hand, will have to pay out of pocket for any repairs or upkeep their property needs.
Here’s a closer look at the costs associated with renting a house:
- Security deposit: Most rentals will require a security deposit that protects the landlord against any potential damages caused by the renter. It’s often equivalent to your first month’s rent.
- Monthly rent: Your monthly rent is controlled by your landlord and can change at any time.
- Utilities: Some leases will include utilities such as water, electric, gas and internet -- but not all. Ask your landlord before signing your lease whether you’ll be required to pay out of pocket for those expenses.
- Broker’s fee: When renting, there’s a chance you’ll pay a broker’s fee when you sign your lease. A broker’s fee is essentially a finder’s fee; brokers, like real estate agents, help you find an apartment and act as the middleman between landlords and renters. This isn’t always the case, but it can potentially cost a pretty penny. The fee will vary, but could look something like 10% to 15% of the annualized rent.
- Renter’s insurance: In most cases, renter’s insurance isn’t required, though it’s often recommended. Renter’s insurance doesn’t cover the property itself -- aside from minor alterations you may make -- but rather protects your personal items against perils like fire or theft. However, it’s not a major expense -- typically less than $30 a month, depending on where you’re located.
To rent or to buy: 5 questions to ask yourself
Still unsure whether to rent or buy a house? Asking yourself these five questions:
How long do you plan to stay?
Buying a home is a good idea if you’re planning to stay put for at least three years. Home values typically increase between 2% and 5% annually, so you could end up paying more in closing costs than you’d earn in proceeds if you sell after only a year or two. In addition, you could owe capital gains taxes if you sell a home you’ve owned for less than two years.
You should also consider 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 may not suit your lifestyle in a few years, so thinking through your plans and timeline can help you decide when and what to buy.
“If a family is planning to be in an area for two years and doesn’t have any major life changes coming up, it usually makes more sense to buy than the rent,” Nadi said. “The critical piece in this conversation, though, is a good lender. They’re the only ones who can give definitive answers regarding what the buyer qualifies for, what those payments look like and what costs are associated with the purchase,” Nadi added.
If you’re not sure whether you’ll stay in one spot for more than a few years, renting makes more sense.
How much can you afford in monthly housing costs?
A good rule of thumb is that you shouldn’t spend more than 30% of your gross monthly income on housing. But that number could be higher or lower depending on a few factors.
If, for example, you live in an area with above-average housing costs, such as a major city like New York City, you may have no choice but to spend closer to 40% of your monthly income. Conversely, if you have other large expenses in your budget such as travel, you may want to aim to pay closer to 20% of your monthly income to leave room for those costs.
Have you saved enough to buy a house?
If you can commit to staying put for at least a few years, the next question you should ask yourself is whether you have enough money saved to buy a house. A typical down payment can run you anywhere from 3% to 20% of the home’s purchase price. A higher down payment will make it easier for you to qualify for a home loan, plus you won’t need to get private mortgage insurance.
You’ll also have to factor in closing costs, which are typically around 3% to 6% of the asking price.
“If you can’t pay for the closing costs, you can’t get the property,” McDaniels said. “Understand what that number looks like in your local market and work with an expert to ensure you have the total money you need.”
In addition, home values appreciated at a rapid clip over the past few years. Even if you’ve been saving for a house for some time, you may find yourself needing to re-adjust your budget to take into account heightened housing prices.
Can you afford all the extra costs of homeownership?
For some people, monthly mortgage payments can be less than monthly rent. In places where rent is particularly expensive, it may make sense to investigate homeownership.
But your calculations shouldn’t stop at comparing rent and mortgage payments. There are other costs associated with homeownership to consider, such as closing costs, insurance, property taxes, HOA fees and maintenance.
“When one goes from renting to owning, they’re responsible for maintaining the property, which can be more expensive than they realize,” McDaniels said. “If you deplete your entire savings account balance for the sake of becoming a homeowner, it can leave you relying on high interest credit card debt should you run into an unexpected expense or emergency -- be it an illness, a job loss or an essential repair,” she adds.
If you’re able to plan for these additional expenses, building equity in your own home offers long-term rewards you won’t get by renting. And there are other benefits to owning, such as being able to deduct interest paid on a mortgage come tax time.
Are you “ready” to be a homeowner?
Even if you can afford to buy, renting may be a better option based on your lifestyle and goals.
If you plan to travel or 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 major breaks, it’s on you to fix it. There’s no landlord to call when your name is on the deed.
However, owning a home means you can personalize it. You can, for example, paint the walls whatever color you like or knock out the kitchen cabinets if you so desire.
And if you’re not sure, waiting and saving will only put you in a better position to buy in the future.
The bottom line
Homeownership may be part of the classic vision of the “American dream,” but that doesn’t mean it’s the right decision for everybody. 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. Thinking through how long you plan to stay in your next place, and what your savings and budget for unexpected expenses looks like, can help you determine whether it makes sense to rent or buy a home.
