About · Press · Contact · Write For Us · Top Personal Finance Blogs
Featured In:

Renting vs. Buying a House – How to Make a Decision, Pros & Cons

By Michele Lerner

couple standing outside houseExtremely low mortgage rates and rising apartment rents in many cities have led some people to dive into homeownership more quickly than they’d originally planned. However, others are choosing to wait until the housing market recovers, in spite of the incentives to buy. The truth is, there’s no one right answer when it comes to determining whether to rent or buy a house.

There are a number of considerations you must make when making this decision. Renting and buying both present a number of pros and cons, and your own financial situation may be the biggest factor of all.

Pros & Cons of Renting

Despite the fact that you can’t build equity, renting offers you the most freedom and flexibility, especially if you are on a month-to-month lease.

Advantages

  • No Maintenance Is Required. If the garbage disposal breaks or you need a plumber, getting maintenance is as easy as calling the superintendent.
  • It’s Easier to Move. If you are not settled into your career or could have an opportunity to relocate in the near future, it is much easier to switch to a month-to-month lease or sublet than it is to sell your home.
  • You Can Avoid Owning a Depreciating Asset. While home prices have stabilized and are rising in most housing markets, there’s no guarantee that your home will increase in value over time.

Disadvantages

  • Your Monthly Payment Can Increase. Rents have been rising in many cities, so you may be facing an increase in your monthly housing payment as soon as your current lease ends.
  • You Don’t Build Equity. When you rent, your housing payment provides you with a place to live, but will not provide you with an asset to sell when you are ready to move.
  • You Don’t Receive Tax Benefits. Homeowners can deduct their mortgage interest payments and their property taxes from their federal income tax, which reduces the final cost of homeownership. Renters cannot deduct any of their housing expenses.
  • You Can’t Paint or Remodel Without the Owner’s Approval. While some landlords are kind enough to let you paint your apartment, you’ll have to get their permission and consult on the color. If you want to make other changes or upgrade an appliance you’ll have to put in a request with your landlord or apartment manager.

for rent house sign

Pros & Cons of Buying a Home

Homeownership is not for everyone, but there are some financial and emotional advantages that can be enticing.

Advantages

  • You Can Build Equity. Historically, homes rise in value anywhere from 4% to 6% per year. Even if your home doesn’t increase in value, though, you’ll be building equity as you pay down your mortgage as long as your home maintains its value.
  • You Can Take Advantage of Tax Breaks for Homeowners. Homeowners can deduct their mortgage interest payments and property taxes when they itemize their federal income taxes. These deductions offset the cost of your housing.
  • Your Housing Payments Will Stay Stable. If you choose a fixed-rate mortgage, your principal and interest payments remain the same for the duration of the loan. However, your homeowners’ insurance and property taxes can change.
  • You May Be Able to Use Your Home as an Investment. If you buy a home and choose to leave it, you can rent it out rather than sell and generate income. This works best if you can cover your mortgage (or more) with rental payments. With this in mind, it pays to choose a home that will make a good rental property in the future.
  • You Can Settle in a Community. Once you commit to owning a home, you are more likely to become more involved in your community because you know you’ll be there for years. You can get to know your neighbors, perhaps join a homeowners’ association, or volunteer for projects that benefit the community or the local school.
  • You Have the Freedom to Decorate as You Please. One of the joys of homeownership is the ability to change your environment to suit your tastes. Of course, if you live within a development with a homeowners’ association you may have a little less freedom with your home’s exterior, but you can still paint your kitchen purple if you like.

Disadvantages

  • You Have to Pay for Your Own Maintenance. As a homeowner, you must spend time and money keeping your home in good repair. You need to set aside funds for unexpected expenses, such as appliances that break, a service contract on your furnace, or the need to replace your windows.
  • Your Home Is an Illiquid Asset. If you would need to sell because of a job relocation or change in your circumstances, you may not be able to sell your home as quickly as you would like or for as much money as you want.
  • You Must Pay Property Taxes. Property taxes can go up, making your home less affordable.
  • Your Home Could Lose Value. As many people have learned the hard way, there’s no guarantee that your home will increase in value over time.
  • Buying a Home Requires a Cash Investment. You need to use up your savings for a down payment and closing costs and for other expenses of homeownership. That cash won’t be available for other investments.
  • Homeowners’ Insurance Is Mandatory If You Have a Mortgage. As a renter, renter’s insurance is recommended but not required. Your lender requires you to insure your residence, and typically you have to pay those insurance premiums along with your mortgage payment.

couple house keys

Important Questions to Consider

1. How Long Do You Expect to Live There?

While buying a home may be one of the most expensive investments you’ll ever make, it also requires a major emotional investment. The days of buying a home and selling it for a profit within a short period of time are pretty much over except for the most savvy house flippers. If you are considering buying a home, be prepared to stay in it for five to seven years or longer in order to recoup the cost of buying, to survive a questionable market, and to build equity. If you can’t make that long-term commitment, you’re probably not ready for the responsibility of homeownership.

2. What Are the Costs of Buying?

A big factor in the decision to buy or own is your local housing market. Check online to get an estimate of rental costs and purchase costs for your area, and check with a realtor to learn about neighborhoods and homes you might want to purchase. Most mortgage lenders are happy to work with first-time buyers to explain the mortgage process and pre-qualify you so you know how much you can borrow. But be careful to consider how much you want to spend on your housing and whether you are ready to make the long-term commitment.

How to Calculate Your Costs
When you rent a home, you typically need to make a security deposit and pay a month or two of rent. As long as you take care of your home, you’ll get your security deposit back when you move. But buying a home costs considerably more money upfront, which is why you need to stay in the home for a few years to build equity and earn a return on your investment.

To start, you need cash for an earnest money deposit when you make an offer on a home, usually anywhere from $500 to $1,000, or as much as 5% of the sales price. You also need to make a down payment of at least 3.5% of the home price with an FHA-insured mortgage, or 5% to 20% with a conventional loan. On a $100,000 home, this will be at least $3,500.

In addition to your  down payment, you have to pay closing costs – usually 2% to 5% of the home price depending on your local real estate market. Other costs of homeownership include moving costs, paying for inspections (such as a home inspection and a termite inspection), repairing or replacing appliances if necessary, and furnishing your new home. It’s essential that you consider all these costs within the context of the cash you have available to you. The last thing you want, for example, is to live in an unfurnished home or one in need of repair or remodeling because you spent everything you had funding the home purchase.

3. What Are Your Future Plans?

While no one really knows exactly where they will be in five years, you should think carefully about your goals for your career and for your personal life. If you hope to climb your career ladder – but may need to relocate to do so – then renting may be the best option, unless you are certain you want to own an investment property.

If you are single and hope to be married, you need to think about your home purchase in terms of whether it will be comfortable for two people or a small family, or whether you will want to sell it or rent it out in a few years. If you are married and hope to start a family, and thereby intend for one spouse to work less or stop working altogether, make sure your housing budget can accommodate a reduction in income. Lastly, if you have an avocation that you love but costs money, such as golfing or skiing, make sure you keep that in mind when you create your housing budget.

4. Do You Have the Ability to Finance a Home Purchase?

If you’re considering buying a home, your first step should be to meet with a lender to determine whether you qualify for a mortgage and, if so, how much you can borrow. Your ability to qualify depends on several major factors:

  • Credit Score. You typically need a credit score of at least 620 or higher to qualify for a mortgage. The lowest interest rates are available to borrowers with a credit score of 740 and above.
  • Income. You must prove that you have a steady income and can afford to repay your mortgage.
  • Debt-to-Income Ratio. Your lender compares the minimum payments on all outstanding debt to your gross monthly income. While the maximum allowable ratio varies by lender, most will not go above 41% to 45% for an overall debt-to-income ratio.
  • Assets. You need to prove you have the savings to pay for a down payment and closings costs, as well as have some cash reserves in the bank.

If you fall short on any of the above criteria, you may be better off renting until you can improve your credit score and save more money.

couple buying house

Final Word

Buying a home is a major decision that shouldn’t be taken lightly, but when faced with rising rent and low mortgage interest rates that make purchasing more affordable, you should take the time to consider the pros and cons of both renting and buying. Long-term homeowners, even those whose homes lost value during the recession, can build wealth that can be used to fund their retirement or pay for college. As long as you can comfortably afford your housing payments and are emotionally prepared to commit to homeownership, buying a home can be a smart financial move.

Do you own your own home, or do you rent? What was the biggest factor in your decision?

Michele Lerner
Michele Lerner, author of "HOMEBUYING: Tough Times, First Time, Any Time," has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Bankrate, Investopedia, Insurance.com, National Real Estate Investor, The Washington Times, Urban Land, NAREIT's REIT, and numerous Realtor associations.

Related Articles

  • Pingback: fwisp.com()

  • http://www.pfsdebtrelief.com Stephan

    i think it all depends on what the life goals are of the person and the current financial situation. cheap credit is hard to come by, and downn payments are again very important for lenders. If you dont have 20%, you will pay PMI, which only boosts your mortgage payments. and defintiely dont get a home for the tax deductions, its ridiculous to spend money to get a break on taxes, thats not the point of tax deductions. IMO, if you can afford to buy, you should as long as you expect to live in the area for at least 5 years

  • http://www.findmaster.com/what_we_do/vancouver_real_estate.64.html Vancouver Real Estate

    What you also need to consider is the long term. Look 5 years down the road and take into consideration current economy, where economy might be in 5 years, house prices (current drop) and interest rates. If interest rates are 2% right now, can you afford the house if interest rates are at 5% or 7%. If that is the case then you are good to go I guess :)

  • David

    I think it all depends on where you are at in life. Initially, I would have always said that buying is the better option, but that may not necessairly be true.

    Good article!

  • http://www.auterytech.com/ Steve

    What you also need to consider is the long term. Look 5 years down the road and take into consideration current economy, where economy might be in 5 years, house prices (current drop) and interest rates. If interest rates are 2% right now, can you afford the house if interest rates are at 5% or 7%. If that is the case then you are good to go I guess :)

  • Pingback: Three Things You Must Consider Before Buying a Home()

  • Pingback: 6 Money Myths Debunked – Alternative Ways to Manage Your Finances « Creative Savings()

  • Oldgoldtop

    I would be very cautious about reading too much into “historic” apprecition (4%-5%) in housing prices witnessed post WWII. The baby boom demographic has had undo influence on all sectors of our economy including housing…supply and demand…demand resulting from the massive influx of boomers into the housing market in the around the 1970’s has been the driving factor in rising prices for the past 40 plus years. Their now declining demand combined with their eventually leaving the housing market due to aging and end of life issues (and heirs dealing with selling the “old home”) will tend to keep supply high in the coming years and I would expect a corrosponding downward pressure on prices. Markets in rertirement areas may see higher demand as many in the “booming” ranks of retirees relocate to those destinations. The financial benifits to homeownership we have grown to expect are likely to be reduced for many years and may not recover until conditions of supply and demand warrant. The mortgage write off may be eliminated and the upkeep and maintenance costs (deducatable for investment property) can be burdensome…and selling can be difficult making relocating difficult or impossible. Unless buyers can expect real price appreciation in their particular situation, purchasing could result in a financial loss and limited flexibility. Investing in rental property (an old fashioned way of making money in real estate) may make better sense from a financial perspective but requires commitment.
    Age old advice…Rent what will decrease in value and buy what will increase!

  • Andrew Black

    Property purchase will always be the better option how ever with mortgage lendingat an all time low, it is unsurprising as to why so many now opt to rent. It may be some time before the market improves but until then, the decision is purely reliant on personal financial decisions

  • Jerry

    The rates are so low now that your mortgage, taxes and insurance are typically lower than most rental prices. It’s a no-brainer. I hope it leads more people into the market so it can continue to grow.

  • http://twitter.com/NJFCU North Jersey FCU

    Good reference for people considering the subject. Then again, as what’s been said in the other comments, it all depends on your qualification and preparedness as a whole – financially, emotionally, etc. if and when you should consider buying a house. You need to take risks when investing but if it’s not the right time for you, don’t rush into anything that could jeopardize your future goals.

  • Cyndi

    Good list of pros and cons. As other said it all depends on the people
    needs and capabilities. However, being practical I would rather be
    buying my own house than renting.

  • http://hollywoodhomesfl.com/ Austin Cody

    Great Post..!
    The common wisdom for decades was to buy a home as soon as you can, because it is great investment. That wisdom turned lot of people upside down in the past decade.

  • Anthony Pagano

    This is a great post and really covers all the areas that people need to consider when purchasing a home. Michele you did a great job and backed all of the considerations with facts and examples. This is an article that I believe most people should read when considering buying or renewing their lease.

    The ‘Important Questions to Consider’ section is great. Number two is really important because most people think of the 20% down and closing cost but don’t consider furnishing the home, the cost of broken or replacing appliances, or tenting when they are calculating all of the cost. So mentioning that in this article was a great eye opener for first time home buyers that may not think of those cost. Overall, great article!

    Anthony

  • Fiona Lin

    When all cash flows are considered, renting costs less, which means you’ll have more money to save & invest. Over the long run, the stock market averages +10%/yr.

    So the 20% downpayment, 3-5% closing costs, 5-6% selling costs every time you move (average US home borrower moves every 7 years), property taxes, maintenance, insurance, is all money that could have been invested.

    If you look at everything (all cash flows considered), you spend less money when you rent! Between property tax, insurance, maintenance, mowing the lawn, fixing the roof, etc. etc. plus the extra utility costs you’re spending a lot of money that could be invested instead. What’s wrong with renting??

    Learn from the past people! (Of course they look at me like I’m crazy when I suggest they cut a $100+ a month cable bill. Or drive a car that is 3 years old. Or only fill up their tank from the cheapest place according to GasBuddy. Or get $25/month budget car insurance from Insurance Panda. Or cook their own food instead of spending a hundred a week on restaurant food (or far more if they like the bar).)

    Nobel Prize winning economist Robert Shiller was one of the few people who accurately called both the stock market crash of 2000, AND the real estate crash of the late 2000s.

    And he says that owning a home is a terrible investment.

  • http://www.rockingrealestate.com Kenny Schneider

    Great Post Michele! Very all-encompassing!

The content on MoneyCrashers.com is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor. References to products, offers, and rates from third party sites often change. While we do our best to keep these updated, numbers stated on this site may differ from actual numbers. We may have financial relationships with some of the companies mentioned on this website. Among other things, we may receive free products, services, and/or monetary compensation in exchange for featured placement of sponsored products or services. We strive to write accurate and genuine reviews and articles, and all views and opinions expressed are solely those of the authors.

Advertiser Disclosure: The credit card offers that appear on this site are from credit card companies from which MoneyCrashers.com receives compensation. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear on category pages. MoneyCrashers.com does not include all credit card companies or all available credit card offers, although best efforts are made to include a comprehensive list of offers regardless of compensation. Advertiser partners include American Express, U.S. Bank, and Barclaycard, among others.
Close