Should I Buy or Rent a Home?
Deciding whether to rent or buy a home involves several factors, including personal financial considerations as well as your lifestyle and future plans. It’s a decision you may have to make at various times in your life, so it’s wise to understand the variables that could influence your choice.
The Differences Between Renting and Owning
Most people assume that the only difference between renting and owning a home is cost, but that’s not the whole story. Depending on your specific situation, there are advantages and disadvantages that come with either renting or owning a home.
Advantages of Renting a Home
Budgeting can be easier when you rent a home. Each month, you can expect to pay only your rent payment for housing; you’ll never have to pay property taxes or homeowners’ association (HOA) fees, as your landlord is responsible for paying those. Also, as a renter, you’ll never have unexpected payments for home repairs, because home maintenance and repairs will be the responsibility of the landlord.
Ease of Movement
Renting also makes it easy to move to a new area; there’s no need to sell a home first, pay a real estate agent or cover closing costs. It can also help to rent in different areas for a while to determine whether you'd like to settle there permanently should you have an opportunity to buy a home.
Saving & Investing
Renting can help maintain your cost of living, so that you may be able to save money while renting a home or apartment that does not stretch your budget. And if you can save while renting, you can invest that money wisely to later use for a down payment on a home.
Disadvantages of Renting a Home
Have you ever heard that renting is “throwing away money"? Some might say that because a rent payment doesn’t allow you to build equity in the same way that owning a house does.
When you buy a home, your monthly payments build ownership in property that, for most people, is their largest and most important asset. When you eventually sell, if the property's value has grown, you will make money on the transaction. When you rent, your monthly payment doesn’t help you work toward this positive outcome.
Inability to Make Changes
Renting also limits your ability to do what you want with your home. For example, if you want to be able to make changes to the property, such as painting, fencing or renovating, you may not have that option as a renter. Sometimes pet ownership is restricted in rental homes.
Lack of Predictability
While your mortgage payment may be stable month-over-month if you purchase a home, rent is not a guaranteed fixed cost. When your lease ends, your rent may increase—or you may be forced to move if your landlord chooses not to renew the lease.
Advantages of Homeownership
Building & Using Equity
If you choose to buy a home, there are a number of benefits. Your monthly mortgage helps you work toward gaining equity in your home. You may also have the option of borrowing against that equity with a home equity loan or line of credit. And if you choose to sell your home, you may be able to earn a profit, depending on whether the value of that home has increased.
Another financial benefit of homeownership is that you may be able to deduct mortgage interest from your taxable income, allowing you to save money on taxes each year. And unless you get a variable-rate mortgage, you can rely on a fixed monthly payment of principal and interest for as long as you keep your home.
Freedom to Remodel & Renovate
As a homeowner, you can remodel or update your home without getting approval from a landlord—and your updates may increase the value of your home.
Disadvantages of Homeownership
Cost of Entry
One of the greatest barriers to home ownership is the need to bring a sizeable amount of cash to the closing. To get the lowest mortgage rates, many people aim to save a down payment representing 20% of the home's total cost. But even if you are just trying for a down payment of 5%, that may mean you must save up tens of thousands of dollars.
Fees & Maintenance Costs
Another disadvantage of homebuying is that you’ll typically have to pay a real estate agent and loan closing costs, which can be expensive. If you need to move within a few years after purchasing your home, you may not make a profit on its sale, or the profit you do make may not be enough to cover the costs, which will result in your losing money.
In addition, buying a home often involves more than coming up with a down payment and covering your monthly mortgage payments. You’ll have to purchase homeowners' insurance and potentially pay local property taxes and HOA dues, depending on where you buy. You will also be responsible for covering the costs of routine maintenance and home repairs. Many experts recommend expecting to pay an average of 2% of the total cost of the home for annual maintenance and repairs.
Risk of Loss
A house is an asset that usually increases in value over time; however that’s not guaranteed. When you buy a home, there’s a risk that your property value could decline, especially if you purchase when housing prices are inflated or in an area that is declining in popularity. If you want to sell your home but its value has declined, you may find yourself "underwater" on your mortgage, meaning you owe more than the current market value of the property. This may mean you'll be stuck staying in the home or losing money on its sale.
Is Renting a Waste of Money?
Renting is not inherently a waste of money. Everyone needs a place to live, and purchasing a home is not always the best option. In some situations, such as when you need a place to live temporarily, renting can be a better choice than purchasing a home.
Renting for a time can enable aspiring homeowners to save and take their time making important decisions before committing to their first home purchase.
Why Might Someone Rent Rather Than Buy?
There are several reasons why renting might make more sense than buying a home, such as:
- The move is temporary. If you plan to move again within a few years, buying a home may not be worth the cost of hiring a Realtor, paying closing costs and incurring other homebuying fees.
- You don’t have a down payment. Saving up for a down payment can take years. If you don’t have a down payment to purchase a home yet, renting is the way to go.
- You don’t want to handle repairs and maintenance. Renting means someone else will handle repairs and maintenance, and you won’t have to worry about that or spend your weekends doing home improvement projects.
Why Might Someone Purchase a House Rather Than Rent?
Many times, purchasing a house makes more sense than renting. Here are some of the circumstances in which buying might be the right option:
- You plan on staying. If you expect to stay in the home for five or more years, purchasing may be the logical choice.
- You want to build equity. Want to view your monthly payments as an investment and build ownership in something that you’ll be able to sell or leave as a legacy to your family? You might want to buy a home rather than renting.
- You value homeownership. Maybe you’ve viewed homeownership as a long-term goal or as an important part of the American dream. If so, you may not be happy renting.
- You want to customize your home. If you want to decorate or remodel your home to match your taste and lifestyle, you'll want to buy.
Is It Cheaper to Rent or Buy a House?
There is no simple answer as to whether it’s cheaper to rent or buy a house. The answer depends on the local rental market, home prices in your area, how long you plan to stay, how much you can save for a down payment, and many other factors. To decide which option will be more cost-effective for you, determine how long you plan to stay in the location and calculate your monthly costs for both renting and purchasing. Keep in mind that rent may increase over time, and that homeownership involves the cost of repairs and maintenance, as well as the potential for increasing HOA fees and property taxes.
Owning a home may not provide returns instantly, but if you plan to stay in a home for a number of years, it may be the right option. Not only will your home have the potential to become an asset with increasing value, but you’ll also enjoy the pride of homeownership and the ability to build long-lasting memories and a sense of stability through owning your home.
Determine the Breakeven Point
The "breakeven point," at which homebuying becomes more cost-effective than renting, typically occurs at about three to five years, depending of course on the cost of your home, the mortgage rate and other variables. You can determine your breakeven point by calculating what you'd pay in rent over the next three years and comparing that to what you'd pay for a mortgage over the next three years. Be sure to include your down payment, closing costs, and estimated costs for home maintenance and repairs.
Am I Ready to Buy?
Wondering if you’re ready to buy a home?
Start by answering these five questions:
- Do you have a down payment saved?
- Do you plan on staying in this home for the next three to five years?
- Have you researched the homebuying process and how to get a mortgage?
- Are you familiar with the local real estate market?
If your answer is yes to all these questions, you may be ready to buy!
Reasons to Keep Renting
Think you may need to keep renting for a while longer?
Ask yourself these questions to help find out:
- Do you plan on making a career change that will necessitate a move, or do you already move frequently for work?
- Are you working to improve your financial standing, such as improving your credit score, reducing your debt, and saving for a down payment?
- Are you feeling pressured to purchase a home because of others' expectations?
If you answered “yes” to two or more of these questions, it may not be the time to buy. Instead, consider carefully why you want to purchase a home and make sure you are ready for the long-term commitment of homeownership.
Connect with us.
Send us your information and a member of our team will contact you to get started.
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.
City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory, or legal advice, and any information provided should not be construed as such. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. Any strategies discussed in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies or information presented taking into account your own particular circumstances.
Loans and lines of credit are subject to credit and property approval. Additional terms and conditions apply. Not all applicants will qualify. Home equity lines of credit are not available in Texas.