Homeownership

Renting vs. Buying a Home: Pros and Cons

October 10, 2019
renting vs buying a home

Do you rent your apartment? If so, you probably dream of the day when you can finally purchase a home. There will be grass, walls thicker than paper and the freedom to do as you please.

Unfortunately, buying a house isn’t as glamorous as it seems, and it’s increasingly not the right choice for every person. So how can you determine the right path for you?

Let’s learn more about renting vs. buying pros and cons so you can get a better idea of which option might work best for you.

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Your Debt to Savings Ratio

Do you have debt? Consider credit cards, car payments, student loans and anything else. If everything is paid off, it could be beneficial to invest in a property. If you have debt, the added expense of homeownership could push you beyond your budget.

How much money is in your savings account? With a conventional home loan, you’ll need 20% of a property’s listing price if you want to avoid the cost of private mortgage insurance (PMI). If you plan to buy a $150,000 home, you’ll want to save $37,500. In 2018, the majority of American home buyers — 43.2% — put down at least 20% as a down payment.

This doesn’t mean there aren’t other options for first-time buyers. FHA loans and private mortgages with lower down payment requirements can help you access homeownership without saving tens of thousands of dollars first. This is a completely valid choice if homeownership is a dream for you and anyone you’ll be buying a home with. But you’ll want to discuss your options with a financial professional and calculate the extra cost of PMI over time.

renting vs buying pros and cons

Your Preferred Lifestyle

Do you plan to stay in one spot for five years or more? If you have town pride, consider buying a home. You can purchase a piece of private property, make desired upgrades and establish your family’s roots. Even if you eventually move, the investment you’ve made in your property over this time can still create financial benefit for you and your household.

If you’re a free spirit, however, homeownership may not be for you. One advantage to renting is the ability to pack up and move on. You can travel around the world and meet new people. You can sell your home if you want to move, but it takes more time and effort. Many young people prefer a more nomadic lifestyle, allowing them to freely navigate career opportunities that may bounce them from city to city.

renting vs buying a home

Managing Home Maintenance

Perhaps one of the most significant costs associated with homeownership is maintenance. Have you looked up prices to repair a house? A roof alone can set you back more than $20,000. What will you do if something expensive, like the water heater or HVAC system, breaks?

According to one study, the average owner spends $16,000 each year on home maintenance. Some states, like New Jersey and Connecticut, come in above average, with annual budgets as high as $18,151. As a renter, you can avoid the high costs of repairs and maintenance and focus on yourself.

Some people enjoy taking on home-based projects and crafting a space that’s perfect for their needs. Others will accept a less personalized rental in return for minimal housework. Whatever camp you belong to, make sure you’re realistic about your financial, mental and physical ability to handle home maintenance.

should you rent or buy a home

The Cost of Living

When you buy a home, you have more expenses. Instead of rent, you will pay a mortgage, which should typically be no more than 25% of your monthly income. A homeowner’s insurance policy is significantly pricier than that for renters. You’ll also be responsible for all utilities, including water, sewage and trash.

At the same time, the key to the renting vs buying debate for many people is where this money is going. Each mortgage payment you make brings you closer to owning a home, which can appreciate in value. You might buy a property for $200,000, then turn around and sell it a decade later for $280,000.

Renting is often cheaper on a month-to-month basis, but once you pay your landlord, that money is gone. If you’re a long-term saver, the relatively steady value of property makes homeownership an attractive prospect.

renting vs buying a home

The Real Estate Market

Homeownership is an excellent investment — if you know when to buy and sell. A lot of people jump into buying a home because they think it’ll be cheaper than renting. According to experts, though, high home prices and mortgage rates make it more affordable to rent than buy in some markets. In the past year, rental rates increased by 4% while the cost of buying a home rose 14%.

After the subprime mortgage crisis in 2008, home prices fell dramatically. Today, however, there’s too much demand and not enough supply.

While the real estate market is seen as a generally stable investment opportunity, it’s still going to fluctuate over time. Therefore, it’s hard for experts to generalize and make claims about whether renting or buying is more beneficial in the long run. Understanding your personal financial goals and property needs is crucial when it comes to evaluating renting vs buying pros and cons.

renting vs buying pros and cons

Other Opportunities to Invest

You miss the opportunity to invest in other things if you’re saving for a down payment. Instead, build your wealth with low risk/high reward investments. If you keep the majority of your cash in stocks and bonds, you’ll be capable of a high return.

If you’re interested in growing your savings, consider bond mutual funds — or any income-oriented mutual funds. You will invest in several instruments, including mortgages, bonds and utility stocks. The diversification lessens the risks encountered with individual securities.

Should You Buy or Rent a Home?

No one can tell you whether it’s better to rent or buy. The answer depends on where you’re at in life and what you hope to accomplish. Fortunately, we can always run through renting vs buying pros and cons to help us make one of the biggest financial decisions we’ll ever face.

Let these basics guide your decision making, and you’ll get a better idea of your path forward. Do you have student loans and hope to travel the world? Then stick to rentals. Are you ready to settle down and stay in one place? Purchasing a home might be worthwhile.

renting vs buying pros and cons

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