What’s better: Renting or buying a house?
Read, 4 minutes
Key takeaways
- Deciding whether to rent or buy a home depends on your personal goals, as well as your finances.
- Renting may be the answer if you want flexibility to move or save money and don’t want to deal with repairs and maintenance.
- Buying may be the answer if you’re ready to settle down, can afford the upfront and ongoing costs, and want to build equity.
“Should I rent or buy?” is one of the biggest financial—and personal—questions you’ll probably face. Each has advantages. If you’re just starting out, or downsizing and trying to simplify your life, renting might be the better financial fit. Owning a home has a strong emotional pull—many people think of it as part of The American Dream. And if you’re financially stable and looking to put down roots, raise a family and build equity over the long term, then buying a house could be financially advantageous.
Before deciding whether to rent or buy, ask yourself what your budget is and if either choice would require you to stretch your finances. Write down your financial and savings goals—saving for retirement, for example—to see how each choice might affect them. Then, consider renting vs. owning through the lens of the following three questions:
How do initial expenses of renting vs. owning compare?
When it comes to upfront costs, renting wins out. While many landlords ask for the first and last month's rent, as well as a security deposit, that is usually the extent of the cash you’ll need to move into a new rental.
Buying a home, on the other hand, is a big financial commitment, and you need to be sure you're ready. You’ll need a down payment—typically 2 percent to 20 percent of the house’s price—which ties up funds that could otherwise be invested. Mortgage-related and other types of closing costs can add another 3 percent to 5 percent to the initial price tag.
Because the upfront costs of buying are substantial, it’s important to consider how long you expect to stay in the home. If you think you’ll need to move again in the few years, renting may be a better option, given that the earliest payments on a mortgage are mostly going toward interest, not growing your equity.
What are the ongoing costs of renting vs. owning?
A benefit of renting is that your monthly expenses are relatively stable. Many variable costs—such as property taxes, maintenance, repairs and even some utilities—are handled by the landlord or included in the rent. You may want to get renter’s insurance to cover your belongings, but those policies are typically much less expensive than homeowners’ insurance.
Quick tip
Keep in mind that a landlord can increase your rent. If that happens, don’t be afraid to negotiate for a rent amount that fits your budget. Consider asking for a longer lease to help reduce the frequency of rent increases.
As a homeowner, you’re responsible for all costs associated with a house. This includes insurance, property taxes, utilities, maintenance and repairs. A widely accepted guideline is to budget 1 percent to 4 percent of your home’s value each year for maintenance and repairs. Plan to set aside another 0.25% for insurance.
If you itemize your tax deductions, you may be able to deduct some or all of your mortgage interest and property taxes. This tax break can help defray ongoing costs. Consult a tax professional on what’s best for you and your financial situation. And while many of the costs of homeownership can vary, if you have a fixed-rate mortgage, your monthly payment isn’t subject to the changes renters often experience at lease renewal time.
What are the long-term benefits of renting vs. owning?
Flexibility is a main selling point of renting. If you think you might move cities or change jobs, you can do so without having to worry about selling a home or, say, finding renters to move in. Lower monthly costs may allow you to save more money—if you invest what you would pay for a down payment as well as any monthly savings, you may be able to match or exceed the gain on a home’s value over the long run.
For most homeowners, their home is also their biggest investment. An owned home is an asset that represents a piece of your overall family wealth. As you make mortgage payments, you build equity—the market value of the house minus what you owe on it. Your equity also increases if your home’s value goes up, for instance thanks to housing prices in your area rising. (Rent payments, by contrast, are purely expenses.)
Once your equity reaches a certain level, you may be able to tap it with a home equity loan or home equity line of credit to consolidate debt, do renovations or pay for college. Just remember that house prices don’t always go up. Historically, they have increased over time, but there have been periods when they fell dramatically. If you sell when prices are falling and haven’t paid much on your mortgage, you could lose money.
Which is cheaper: Renting or owning?
For years, conventional wisdom said renting is cheaper than buying—and that renting freed up money for other things, such as savings and investments. However, that’s not always the case. While the out-of-pocket costs of renting are almost always lower than the first few years of home ownership, it’s hard to make a general prediction beyond that.
The cost of renting vs. buying depends on your location and larger economic conditions. For example, rent increased by double digits after the COVID-19 pandemic, according to the Harvard Joint Center for Housing Studies. The increase stemmed from a combination of factors, including a lack of new housing construction, inflation and higher interest rates. Such market shifts may make it cheaper over time to buy rather than rent in some areas.
Choosing where to make your home is as much an emotional decision as a financial one. The right option for you is the one that best fits your life goals, as well as your finances.
