Given the hefty upfront costs associated with purchasing a home, most young people begin their independent lives renting an apartment. As they build careers, save money, and start families, many choose to buy a home. On the other end of the age spectrum, homeowners nearing retirement may choose to sell their family homes, downsize, and become renters once more.
Since the middle of the 20th century, the U.S. homeownership rate has fluctuated between 62% and 70%. According to the U.S. Census Bureau, it’s currently around 66%, up from multi-decade lows in the late 2010s. The homeowner vacancy rate is about 0.7%, compared with a rental vacancy rate of about 7%. The rental vacancy rate is usually higher than the homeowner vacancy rate, so this gap isn’t particularly unusual or surprising.
Recent U.S. Homeownership Trends & How to Think About Homeownership Today
In fact, despite recent gains, the homeownership rate has been depressed for many years. The decline dates back to the housing bust and financial crisis of the late 2000s, but it has several root causes:
- Aging Baby Boomers moving from owner-occupied homes to cozier rental units
- Historically high housing prices, making homeownership less affordable
- High mortgage interest rates, compounding affordability issues
- High student debt loans that prevent many younger buyers from saving enough for a down payment
Regardless of the big-picture forces that affect homeownership rates, determining whether and when to purchase a home is a personal choice that demands careful deliberation. This decision varies from market to market – what makes sense in Peoria might not work in San Francisco, and vice versa. Also, because American culture idealizes homeownership to a certain extent, emotional and social pressures can affect the decision almost as much as financial concerns.
Whether you’re a renter interested in buying a home or a homeowner wondering whether renting makes more sense at this point in your life, it’s never a bad time to evaluate the relative costs, benefits, and drawbacks of owning versus renting your home.
Costs of Buying & Owning Your Home
First, consider the costs of buying and owning a home of your own. We can break these costs down into three categories: upfront costs, recurring costs, and one-off costs that may arise during your time as a homeowner.
Upfront Costs of Homeownership (Including Closing Costs)
Buying a home entails numerous upfront costs. Some are paid out of pocket after the seller accepts your purchase offer, while others are paid at closing.
To show the seller you’re serious about buying the property, it’s customary to accompany your purchase offer with an earnest money check, essentially a down payment on your down payment.
Earnest money generally ranges from 1% to 3% of the home’s purchase price, depending on local market conditions and the seller’s preference. After accepting the offer, the seller deposits the earnest money funds into an escrow account. The amount is usually credited against your closing costs if the transaction goes through.
Your down payment is the percentage of the home’s purchase price that you pay upfront, typically at closing. You need to specify a down payment amount in your purchase offer, though you can change it prior to closing if the seller agrees.
Your down payment amount varies widely based on your credit profile, local market conditions, and the type of mortgage loan you’re approved for. The typical range is 3% to 25% of the purchase price, but certain federally backed mortgages (VA and certain USDA loans) don’t require any down payment.
To ensure that the offer price matches the actual value of the home, lenders require a home appraisal prior to approving the loan. Appraisal costs, typically $300 to $600, are paid during or before the appraisal.
Licensed home inspectors are trained to find potential problems and defects that might not be apparent to an inexperienced buyer doing a casual walk-through. For this reason, buyers are strongly encouraged to get one, even though private lenders rarely make loan approval conditional on a completed home inspection. The cost is similar to the appraisal and is usually paid on the day of the inspection.
Prorated Property Taxes
Since property owners pay property taxes upfront, usually in six-month increments, you may need to compensate the seller for taxes paid on the period between the closing date and the end of the current tax period.
Known as proration, this expense varies widely based on your local tax rate and the closing date. You could be responsible for nearly a full year of property taxes, or practically none at all.
First Year’s Homeowners Insurance
Lenders require proof of homeowners insurance prior to closing. You almost always need to pay the first year’s premium upfront, either on the date you purchase the policy or at closing. Homeowners insurance costs vary based on the value, style, location, and contents of the home, as well as your credit score, policy deductible, and coverage limits.
Use an online insurance broker like PolicyGenius to get a sense of your potential annual premium. A very rough rule of thumb is 0.5% of the home’s value.
Other Closing Costs
Appraisal, inspection, taxes, and insurance are just a few of the many line items bundled into your closing. Other closing costs include but aren’t limited to:
- Loan origination charges
- Credit report fee
- Flood certification fee
- Lender’s and owner’s title insurance
- Recording taxes
- State and local transfer taxes
- First month’s mortgage interest
- Closing or settlement fee
- Broker fee
As a rule of thumb, you can expect your total closing costs to range from 2% to 5% of the purchase price, with the ratio falling as the purchase price increases. Your closing costs will be lower if you don’t have a mortgage loan, but few first-time homebuyers have the resources to buy in all cash.
Depending on local real estate market conditions, general economic climate, and negotiations, the seller may agree to pay some or all of your closing costs. Before making an offer, ask your agent whether it’s realistic to expect the seller to share or cover closing costs in your current market.
Recurring Costs of Homeownership
Homeownership also involves many recurring costs. Some are included in the monthly escrow payment you make to your lender or mortgage servicer, while others are paid separately.
You need to make monthly principal and interest payments for the life of your mortgage loan, usually 15 or 30 years. If you have a fixed-rate mortgage, your loan payment remains constant for the full term. If you have an adjustable-rate mortgage, your rate gets tied to a benchmark and your payment varies as the benchmark changes. Your loan payment is part of your monthly escrow payment.
Your property taxes pay for local schools, infrastructure, and other critical services. Rates vary widely by location and often change from year to year. Most homeowners with mortgages bundle their property taxes into the monthly escrow payment for convenience, but you can budget on your own and pay them directly if you prefer.
According to the Insurance Information Institute, the average annual U.S. homeowners insurance premium was $1,311 in 2020. However, homeowners insurance premiums can vary from year to year based on changes in your home’s appraised value, your policy’s deductible and coverage amounts, your claim history, and your credit score.
As with property taxes, you typically pay one-twelfth of your annual homeowners premium with your monthly escrow payment. But you can pay your insurance company directly if you prefer.
Private Mortgage Insurance
If you have a conventional mortgage loan and your down payment is less than 20% of the purchase price of your home, your monthly escrow payment initially includes a private mortgage insurance (PMI) premium payment. Monthly PMI payments typically range from $50 to $400, depending on your loan’s balance and PMI rate.
PMI protects your lender from financial loss if your home is foreclosed upon and sold at a discount relative to your purchase price. Your lender can legally charge PMI premiums until your loan-to-value (LTV) ratio reaches 78%. You can ask your lender to cancel PMI once your LTV reaches 80%, but this may require you to pay several hundred dollars out of pocket for a fresh appraisal, so it’s often not worth it.
If you have an FHA mortgage designed for first-time buyers with less-than-perfect credit, you may need to pay a one-time mortgage insurance premium (MIP) upfront, plus an ongoing monthly mortgage insurance premium that lasts at least 11 years from origination regardless of loan balance. The exact requirements and costs depend on your loan term and starting LTV, but FHA mortgage insurance is generally more expensive than private mortgage insurance. .
If you live in a homeowners association (HOA) community, you’ll have an additional line item on your mortgage escrow payment, or at least another monthly or annual housing expense to worry about: your HOA dues. Common in newer single-family subdivisions and in condo and townhome complexes, annual HOA dues can add up to 0.5% to 3% of the home’s value.
As a homeowner, you’re responsible for paying all utilities and local services on your property: water, heating, electricity, garbage and recycling, cable and Internet, and whatever else. These costs vary widely by location and usage, but they account for several hundred dollars monthly at the typical residence.
You’re also responsible for all home maintenance and upkeep costs, such as replacing worn-out fixtures and appliances, exterior painting and finishing, interior cleaning, and HVAC maintenance.
As a general rule of thumb, you can expect to pay 1% of your home’s value per year on maintenance and wear-related replacements and repairs. But these expenses may come in spurts, with some years almost maintenance-free and others with tons of expenses.
Special or One-Time Costs of Homeownership
Homeownership also comes with somewhat less-predictable costs that occur only once or at irregular intervals.
If you’re a first-time homebuyer, your new home is probably larger than your previous space. That means you need to buy furniture and fixtures, even if you owned some or all of the furnishings in your rental.
If you’re a repeat buyer, furnishing isn’t quite so costly. Regardless, your furnishing expenses are likely to vary in accordance with your budget. Purchasing secondhand furniture and fixtures is a great way to reduce this expense.
Whether you hire a team of white-glove movers or rent a truck from Uhaul.com and take a DIY approach, moving costs money. Expect to pay anywhere from from around $100 or $200 to more than $1,000 for a local move, depending on how much you have to move, how far you’re going, and what you can accomplish on your own. Long-distance moves can cost several thousand dollars.
You’re responsible for paying to repair any damage that isn’t covered by insurance. For instance, if your basement sustains water damage due to exterior flooding and you don’t carry a flood insurance policy, any mold remediation costs are yours to pay out-of-pocket.
Even less costly repairs and replacements can add up. For instance, a child or pet denting a wall, knocking over and breaking a lamp, or soiling a carpet beyond repair can get expensive.
Improvements and Renovation Projects
If you want to take on a home improvement or renovation project, you either need to pay for it out-of-pocket or finance it – maybe with a home improvement loan that you can get from a company like LightStream or a home equity line of credit from your local bank. Just know that financing options often come with stipulations and may carry interest rates significantly higher than your mortgage rate.
As for the project itself, costs vary widely. A full kitchen renovation or finished basement can easily soar past the $50,000 mark, while updating your porch furniture might only cost a couple thousand bucks. Though improvement and renovation projects can boost your home’s appraised value, that’s not guaranteed to be reflected in its eventual sale price.
Costs of Renting Your Home
Renting also has upfront and recurring costs, though fewer of both. That’s no guarantee it’s cheaper than owning though.
Upfront Costs of Renting
Renting doesn’t involve a costly purchase process, so it has fewer upfront expenses. Still, you may encounter the following costs before or shortly after moving into a new apartment.
Landlords require a security deposit to insure against property damage requiring repairs, delinquent rent, broken leases, and other incidentals. Many states limit security deposits to 1.5 or 2 times monthly rent.
First Month’s Rent
Most landlords require the first month’s rent upfront. If you move in the middle of the month, your landlord may accept a prorated rent payment.
Depending on the rental property laws in your state, your living situation, and your landlord’s preferences, you may be charged nonrefundable deposits in addition to your security deposit. For instance, pet deposits are commonplace. They typically range from $100 to $500, depending on the type of animal and base rent.
Like homebuyers, renters have to pay to move their belongings, whether by hiring movers, renting a truck and driving it themselves, or relying on friends.
Recurring Costs of Renting
Rentals come with some of the same (or similar) recurring expenses as owner-occupied homes. But there aren’t as many, they’re often not as expensive, and some are voluntary (if strongly recommended).
Unless you live in a rent-controlled neighborhood or a city with strict renter protection laws, your rent can increase whenever you sign a new lease. Rent payments vary widely based on local market conditions, number of occupants, and the size, condition, and location of the rental.
Instead of a pet deposit, some landlords charge pet rent. Pet rent spreads the expected cost of pet-related wear and tear over the tenant’s entire stay. It usually amounts to $10 to $40 per month, depending on the animal and base rent.
Your landlord might not require you to carry renters insurance for your personal possessions, but it’s highly recommended to protect against loss due to theft, fire, and other perils.
Renters insurance costs depend on the value and nature of insured property, coverage limits, deductibles, and other factors. According to the Insurance Institute, the median monthly cost of renters insurance is about $20.
Utilities vary by landlord and region. In some dwellings, particularly those in larger, older apartment buildings, all utilities (including things like cable and Internet) may be included in the monthly rent. In other settings, renters are responsible for most or all utilities, like homeowners.
Many rentals don’t have in-unit laundry machines. Tenants either need to find a nearby laundromat or use coin or card-operated machines onsite. In either case, the process requires direct payment of around $2 to $4 per cycle. Even for tenants who employ strategies to save money on laundry, that adds up to $9 to $18 per person, per month, assuming one load each, per week.
Advantages of Buying
Homeownership has plenty to recommend it. You’re probably familiar with some of these advantages already.
1. Building Equity Over Time
Unlike renters, homeowners build equity over time. On most mortgages, a portion of each monthly payment goes toward the loan’s interest. The remainder pays down its principal. Your lender’s amortization schedule shows the exact proportions, which change over time, for each month’s payment.
Every dollar you put toward your loan’s principal represents a dollar of equity – actual ownership of the property. Once you owe comfortably less on your mortgage than the home is worth, you can tap that equity through a home equity loan or refinance your mortgage to secure a lower interest rate or longer repayment window.
You can also boost your home’s value, and thus lower your LTV, by making smart home improvements. There’s no such thing as guaranteed 100% return on investment when it comes to home improvement projects, but finishing a basement, paving a driveway, and adding a bathroom are all regarded as high-ROI investments if you’re able to keep costs in check.
2. Tax Benefits
Several tax benefits cater exclusively to homeowners, though not all homeowners qualify for all benefits. These are the most notable:
- Homestead exemption. Many states exempt owner-occupied homes (homesteads) from a portion of the property tax burden that would normally accrue. For instance, Louisiana exempts the first $75,000 of a home’s value from property tax assessments, so a $200,000 home in New Orleans is taxed as if it were worth $125,000.
- Federal tax deductions. If you itemize your federal income tax deductions, you can deduct your property taxes and the interest paid on your mortgage, reducing your overall income tax burden (often substantially). This particularly benefits those in higher tax brackets.
These benefits aren’t available to renters.
3. Potential for Rental Income
Even if you don’t initially think of your home as an investment property, you can turn it into a source of income. This can partially or totally offset your mortgage, tax, and insurance payments on it.
The easiest way to do this is by renting out part or all of the property, provided you follow all local rental property laws. You might rent out a basement bedroom to a friend, live in one unit of a duplex and rent out the other to strangers, or purchase and move into a second home, leaving your entire property free to rent. You can also plunge into the sharing economy and list your house on Airbnb, Vrbo, or another house-sharing platform.
4. More Creative Freedom
As a homeowner, your decorating, DIY project, and home improvement choices answer to no one, provided they don’t break local building codes or violate homeowners’ association rules. You can paint walls, add new bathroom fixtures, update your kitchen, finish your basement, or build a patio or deck to your heart’s content.
Radically changing your living environment to suit your whims is a fun, and even cathartic aspect of homeownership. It’s one that’s generally not available to renters.
5. Sense of Belonging and Community
Since homeowners tend to stay in their homes for longer than renters, they’re more likely to put down roots in their communities. This manifests in many ways. You might join a local neighborhood association, sponsor block parties or National Nights Out, volunteer at a nearby community center, join a school group, or align with a business improvement district. As a renter, you might not do any of those things, particularly if you know you may be moving in a year or two.
Disadvantages of Buying
Homeownership isn’t all upside. In fact, it has some downsides that might not be apparent to first-time buyers preoccupied with the idea of owning a slice of their neighborhood.
1. Potential for Financial Loss
Although homeownership builds equity over time, equity doesn’t equate to automatic profit. If home values in your area decrease or remain flat during your tenure as a homeowner, dragging down the appraised value of your home, you risk a financial loss when you sell. While renting doesn’t build equity, it also doesn’t involve the risk of owning a depreciating asset.
2. Responsibility for Maintenance and Repairs
As a homeowner, you’re responsible for covering the cost of all uninsured maintenance and repair work on your home. Though your exact outlay is likely to vary from one year to the next, you can expect to pay about 1% of the value of your home annually toward these expenses. If you live in a $300,000 home for 10 years, that’s $30,000 over the period, and perhaps more if you have to replace a costly fixture or appliance, such as a furnace.
3. Most Homes Aren’t Sold Furnished
Some new construction homes come fully furnished, but don’t bank on your next house being that way. Unless your previous residence was similarly sized and fully furnished, you need to spend time, money, and energy furnishing your newly purchased home.
By contrast, many rentals come furnished. Even if their decorations don’t quite match your tastes, furnished spaces save resources and sanity on the front end of your tenure.
4. High Upfront Costs
Though upfront home buying costs vary greatly depending on the size of the down payment and the value of the home, you can expect to shell out no less than 6% of your home’s value (assuming a very low down payment and reasonably low closing costs) before moving in. You could spend well over 20% of the purchase price.
By contrast, most renters pay relatively low upfront costs. And those who get back part or all of their previous apartment’s security deposit can put it toward the security deposit on their new place.
Advantages of Renting
It should already be clear that renting has some advantages over homeownership. These are the biggest (and easiest on your wallet).
1. No Responsibility for Maintenance or Repairs
As a renter, you’re not responsible for home maintenance or repair costs. If a toilet backs up, a pipe bursts, or an appliance stops working, you don’t have to call an expensive repair person – you just have to call your landlord or property manager.
2. Relocating Is Easier
When you rent, relocating for work is easier, less time-consuming, and potentially less costly. That’s why renters who change jobs often (or have steady jobs that require frequent relocation) typically rent until their professional lives stabilize. Though a sudden move may require you to break your rental lease, you can partially or fully offset the cost by subletting your apartment or negotiating with your landlord.
By contrast, selling a home takes time and effort. If you need to sell your house quickly, you may be forced to accept a lower price and potentially take a loss on your investment.
3. No Exposure to the Real Estate Market
Home values fluctuate in response to changing economic conditions, and can decline over time. If you’re a renter, that’s not your problem – it’s your landlord’s.
4. Credit Requirements Generally Less Strict
Although many landlords require prospective renters to undergo a credit check, it’s typically not as strict or time-consuming as mortgage underwriting. Your application is either approved or denied based on your credit score and credit history. As long as you don’t have a checkered credit report that includes a recent bankruptcy, you’re likely to find a landlord willing to rent to you.
By contrast, mortgage lenders typically have high credit standards, with credit scores below 680 or 700 considered subprime in many cases. Even small changes to your credit score can significantly affect your mortgage rates, potentially adding thousands of dollars in interest over your loan term.
Pro tip: If your credit score is lower than you’d like, consider signing up for Experian Boost. This free service will use your phone and utility bill payments to improve your credit score immediately.
5. Some Utilities May Be Included
Many multi-unit building owners cover the cost of most or all utilities, including non-essentials such as cable television. The practice is less common, but definitely still possible, in smaller buildings like duplexes and single-family homes. By contrast, homeowners have to pay full utility costs, sometimes several hundred dollars per month, depending on dwelling size and usage.
Disadvantages of Renting
Renting does have some important downsides. Only you can decide whether they collectively outweigh the benefits.
1. No Equity Building
Unless you’re in a least-to-own situation, every dollar you pay in rent is gone forever. No matter how long you remain in your rental unit or how exemplary a tenant you are, you can’t build equity in the property under a standard lease agreement. So if you plan on staying in the same location for more than a few years, buying may be a smarter financial choice than renting, even if you end up selling for not much more than the purchase price.
2. No Federal Tax Benefits
While homeowners can deduct property taxes and mortgage interest on their federal income tax returns, renters aren’t eligible for any housing-related federal tax credits or deductions. Depending on your property tax and mortgage interest burden, this shortcoming can raise your federal tax liability by several hundred dollars per year.
3. Limited Control Over Ongoing Housing Costs
Unless you live in a municipality with rent control laws, your landlord has the ability to raise your rent once your current lease expires. Rental property owners raise rents to match rent increases elsewhere in the market, to compel current tenants to vacate the premises rather than sign a new lease, and for many other reasons.
If you maintain a good relationship with your landlord, you’re less likely to face onerous rent increases from year to year. No matter what you do, though, you can’t exercise complete control over your rent.
By contrast, homeowners with fixed-rate mortgages make the same principal and interest payments each month unless and until they refinance, regardless of what the local real estate market does. Your homeowners insurance premiums and property tax payments might increase, but the net effect won’t be as dramatic as relentless annual rent increases.
4. Limited Housing Security
While most jurisdictions have generous renter protection laws that prohibit landlords from evicting without cause and require adequate notice (typically 30 or 60 days) that tenants won’t be given an option to renew their leases, no law entitles you to remain in your rental unit indefinitely. Homeowners don’t face such uncertainty. They can remain in their homes as long as they stay current on their mortgage payments.
The New York Times has a handy calculator that weighs the known costs (both financial and time) associated with renting and buying.
Although this calculator can help you decide what makes the most financial sense in a particular situation, it can’t help you evaluate all the subjective, non-financial factors that affect your ultimate decision.
Only you and your loved ones can make the final choice, so as you work toward an ultimate decision, keep an open mind. Remember that it’s better to wait and make the right call than rush into a choice you come to regret.