If you’ve been renting for a while, you might wonder when the right time to buy a house is. Where you fall in the split of renting vs. buying a home depends on various factors, from your finances to your lifestyle to career plans, so your answer to this question will depend on your individual circumstances.
For those looking for more flexibility in their living situation, renting is likely the best solution. But for those who are ready to settle down, buying a house can be a savvy investment. To find out how much house you can afford, use a mortgage calculator.
Renters enjoy many benefits when they are not locked into property ownership. The piecemeal basis of rent — typically a twelve-month contract with the option to renew once annually — gives renters freedom and flexibility to move when their lease is up. Renters also don't have to worry about costs for maintenance, repairs, or property taxes, and may have some great amenities in their building.
Compared to homeownership, renting also requires fewer upfront costs. There are security deposits and maybe brokers' fees, but when compared to down payment and closing costs for buying a house — which can be as much as 5% to 25% of the home's purchase price — these fees are minimal.
However, renting also comes with some disadvantages. Namely, the lack of control a renter has over their living situation. Landlords can raise the rent, eventually making your home unaffordable, and they can also sell the property at any time, forcing renters to find a new place to live with little notice.
Homeownership offers owners more control over their living circumstances — you’re locked into your mortgage, you can remodel and decorate your home to your tastes, and you don’t have to worry about a landlord micromanaging the way you live.
But with that control comes more responsibilities. The total cost of homeownership can be greater than renting, even if the mortgage payment is less than the monthly rent payment. Here are just a few of the expenses that homeowners are on the hook for that renters aren’t:
Additionally, a home is an asset — one that can add significant value to homeowners net worth. However, your property's value is dependent on market conditions.
If you’re wondering whether buying or renting a home is better for you, consider these major differences.
The ability to buy a home has long been characterized as a meaningful benchmark in achieving the American Dream. Not only is it an emotional milestone, it’s also a financial one.
Owning a home is the most common way that people grow their wealth. As homeowners pay down their mortgage and their property appreciates value, they build equity — money they don’t need to pay back to their lender — in their investment. That equity counts towards their net worth, a valuable indicator of financial health.
This is one of the biggest benefits of homeownership: every mortgage payment is an investment in a homeowner’s net worth, whereas rent payments are an investment in your landlord’s.
Property values can fluctuate due to changes in the housing market. While these factors can sometimes impact renters, they have a much larger effect on homeowners, whose wealth is often tied up in the value of their house.
As such, homeowners will need to be vigilant in protecting the worth of their home. This can include:
If you itemize your deductions, you may be able to reduce your federal income tax bill when you own a house. Homeowners can deduct the mortgage interest on their home loan of up to $750,000 and an additional $10,000 of property taxes each year. These deductions can significantly impact homeowners, especially when compared to renting, which offers no tax benefits (other than the standard deduction for all taxpayers).
As a renter, your landlord is responsible for keeping your dwelling in good condition. That means when a pipe bursts, it’s their problem.
On the other hand, homeowners are their own landlords, which means they're responsible for fixing the things that need it. Experts recommend that homeowners budget at least 1% of their home's value annually for maintenance expenses — which can total as much as $4,403 for the median-priced home of $440,300.
Financing a home purchase often requires financial leverage — borrowing money to make money. If home prices go up, homeowners make money in the form of equity that they can cash in when they sell their homes or if they choose to refinance. If home prices go down, homeowners can end up owing more on their mortgage than their home is worth.
It can often take years of paying down a mortgage before homeowners see equity amass in their investments. Renters who are looking to buy should be prepared to stay for the long haul.
If you're trying to decide between renting and buying a home, you can download the worksheet below to track your potential expenses for each.
The choice to rent or buy a home comes down to personal preference. Renting can give you more flexibility at a lower upfront cost than buying but provides less certainty in the long run. Buying a home can offer more stability and wealth but requires more responsibility and a long-term commitment from buyers.
If you're on the fence about renting or buying a house, trying using a calculator to see what makes the most sense in your situation.
Most renters cite their lack of down payment savings as the main factor holding them back from buying their first home. However, these renters might not know about first-time homebuyer programs, which offer down payment assistance and competitive mortgage interest rates to help home buyers start investing and building equity sooner.
Renters with middling credit scores can also look at government-backed loans, which have less stringent requirements, including lower down payments.
For example, FHA loans are backed by the Federal Housing Administration and offer low-interest rates with low down payments to qualified borrowers. With this loan, you could purchase a $425,000 home with just a 3.5% down payment ($14,875) and an interest rate of 5.1%, making your monthly mortgage payment $2,226. That’s comparable to the median national rent of over $2,000 a month.
Your current monthly rent payment is a good starting point to determine how much you can afford for a monthly mortgage. Work backward from that number to see how much you'd need to save up for a down payment.
If you need help crunching the numbers, speak with a financial advisor or mortgage lender. They’ll walk you through the pros and cons of renting or buying a house, from private mortgage insurance to closing costs to tax deductions.
The decision to rent or buy is a big one, and a lot of questions can come up in the process. Here are a few of the most commonly asked questions:
There’s no single answer to whether it’s better to rent or own a home — it will depend on the individual circumstances of the person asking. It’s unlikely that rent or house prices will drop in the near future. Instead of waiting on the market, consider your finances, lifestyle, and personal goals as you weigh the pros and cons of renting or owning a home.
Renting a home is cheaper than buying in the near term, but over time, owning a home becomes cheaper. The exact calculations will depend on a variety of factors — like where you live and the cost of living — but generally, you can break even on the cost of buying a home vs. renting after five years of staying in a home.
Homeownership is one of the greatest drivers of wealth for Americans and can be a good investment if you're financially ready to own a home. According to a survey conducted by the Federal Reserve, the net worth of homeowners was 40 times greater than that of renters.
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