Is it better to rent or buy a house? That’s one of the most common financial questions people face today. Rising home prices, higher mortgage rates, and increasing rents have made the decision more complicated than in the past. Renting and buying each have their own benefits, but which is better for you? It all depends on your current/ideal lifestyle, financial situation, and goals. Whether you buy or rent will have important implications for both your finances and your happiness. Here are some pros and cons to consider when determining whether buying a home vs. renting a home is right for you.

Pros and Cons of Renting a Home

Pros of Renting a Home:

(1) Flexibility: Renting provides a lot more flexibility than owning a home. When your lease is up, you can move out — even relocate to another city — without worrying about selling your home. You can also have an easier time adapting to your current lifestyle and needs. Renting allows you to see different homes and neighborhoods. This will enable you to find the right fit without having to make a full commitment.

(2) Lower Upfront Costs: Renting typically only requires a security deposit and the first month’s rent. This is a more accessible option for most compared to the hefty down payment and closing costs associated with buying a home.

(3) Fewer Responsibilities: When renting, the landlord typically handles the maintenance and repairs of the apartment or house. You don’t need to worry about any unexpected repair expenses, unlike when owning a home.

(4) Access to Amenities: Based on where you live, certain rental properties offer amenities like pools, fitness centers, and community spaces. These would be costly to access when buying a home, which makes renting much more appealing for convenience and lifestyle.

Cons of Renting a Home:

(1) Rent Increases: It is always a possibility that your rent could increase. The new cost could be beyond your budget. If so, you might need to go through the hassle of finding a new place to rent.

(2) Uncertainty: You never know when the rental property owner may decide to sell the property or not offer an option for renewing the lease. This would mean you would need to relocate, and this could happen with little to no preparation or notice.

(3) No Home Equity: You don’t build any equity in the property when renting. Home equity is the amount you’ve paid as a percentage of what you still owe when owning a home. When you pay rent each month, you’re helping the landlord build equity and income instead of building your own wealth.

(4) Limited Control Over Home: You have to accept the space as it is and will not have much leeway to make changes to the property. Even if the landlord allows you to make specific changes, that ultimately benefits the landlord, not you, as it is not your permanent/long-term space.

(5) Temporary Accommodations: This can be the biggest pro but also the biggest con when it comes to renting. If you’re planning to stay somewhere for years to come, renting might not be the best option. Many leases only last a year, and if your landlord decides to sell the property, you may be looking at a large rent increase or mandatory relocation.

Pros and Cons of Buying a Home

Pros of Buying a Home:

(1) Building Equity: As you continue to pay down your mortgage, you build equity in your property. It also increases when your home value increases. This adds to your net worth and becomes a crucial financial asset. Your equity can also serve as collateral for a loan or line of credit if you need to borrow money.

(2) Stability: Instead of worrying about a landlord who may decide to increase your rent, stop renting the property out, or sell it, owning a home provides long-term stability. As long as you have a fixed-interest mortgage, your mortgage payments stay consistent over time. You have the final say on how long you want to stay and if or when you would like to sell your home.

(3) Customization: You have creative freedom over your home to make the space truly your own, without needing any approval. You can paint, remodel, and customize however you like.

(4) Tax Benefits: Homeowners who itemize their deductions can deduct interest paid on mortgages up to $750,000 in value. You can also deduct state and local property taxes paid up to $40,000 (within certain income limits). The IRS also allows self-employed homeowners to deduct expenses if they have a dedicated home office space. If you were ever to sell your home, you can exclude up to $250,000 ($500,000 for married couples) of income when calculating capital gains tax. You must meet ownership and residency requirements, which call for you to have owned and lived in your home for at least two of the last five years. You cannot have used this exclusion on another home sale in the last two years.

Now that we’ve covered the pros of buying a home, here are some cons to consider.

Cons of Buying a Home:

(1) Higher Upfront Costs: A down payment is made to show your financial commitment. It will reduce your loan amount and possibly your interest rate. Typically, you need to put down about 20% of the total purchase price of the home to avoid paying for mortgage insurance, which protects the lender if you’re unable to make your mortgage payments. This doesn’t even include closing costs. Many homebuyers focus solely on coming up with the amount for their down payment but overlook the associated costs of completing the transaction. Closing costs typically range from 2% to 5% of the home’s purchase price and include items such as inspections, lender’s fees, and various other charges/fees.

(2) Maintenance: Owning a home comes with the responsibility of maintaining it. If something breaks or needs to be fixed, it’s up to you to deal with and pay for the repairs. You’ll also need to prepare for emergency repairs, like a pipe bursting, a leaky roof, or a broken heat pump.

(3) Less Flexibility: Homeowners don’t have the flexibility to relocate whenever they see fit. You’d have the option of selling your home, renting it out, or leaving it vacant altogether. But if you were to move too quickly, you might not qualify for the capital gains tax exclusion, a situation that could be very costly.

(4) Additional Costs: There are a variety of additional costs that can add up with your housing expenses. Property taxes are a big one. They could be substantial depending on where you live. For example, New Hampshire has very high property taxes compared to many other states. Other costs include homeowners’ insurance, upgrades to the house, and possibly HOA fees.

(5) Risk of Home Value Decline: Historically, home prices rise over long periods of time, but they don’t always. There are numerous factors outside of your control that could lead to a decrease in the value of your home, such as changes in the economy or the surrounding environment/neighborhood. You’ll need to consider how you’d feel if your home value didn’t increase or even decreased over a long period of time.

Renting vs. Buying a Home: Financial Considerations

Now we’ll examine the financial considerations to keep in mind when deciding between renting and buying. Comparing the market rent to the estimated mortgage payment wherever you are looking to live can help you determine which option is better for you. A useful calculation to consider is the price-to-rent ratio, which is calculated by dividing the median home price by the median annual rent. It is a benchmark for determining whether it’s cheaper to rent or buy. However, it doesn’t indicate the affordability of either based on your current financial situation. You’ll want to consider whether buying overstretches you financially, making it more challenging to save for other important financial goals, such as retirement.

A good place to start is by reviewing your credit score. Without solid credit, you’ll be at a disadvantage in today’s competitive buying market. You may not be eligible for a favorable mortgage rate or even be approved at all. Do you have enough set aside to pay for the upfront costs of buying a home? This could also affect your eligibility for a reasonable mortgage rate. Renting might offer more flexibility without the need to spend so much time saving and budgeting for the upfront and additional costs that come with buying a home. Overall, your financial position will determine if you’re able to buy a house, but your finances aren’t the only factor.

Lifestyle Factors

Renting vs. buying is also a lifestyle choice. It depends on what best suits your needs in terms of how you want to live. Your job stability, income, and location have a significant impact on whether renting or buying is right for you. If you’re committed to where you are and your income is stable, buying a home may be better for you. However, if you’re considering changing jobs or exploring future career opportunities, renting might be a better option. You’ll want to think about where you are and where you would like to be in your career over the next few years.

Your preference for mobility or permanence is also a factor in deciding what works for you. This can heavily relate to and/or influence your career choices. Renting will offer more flexibility for travel, relocation, or making lifestyle changes. It allows for easier transitions and smaller financial commitments, especially if you plan to move frequently or travel often, personally or professionally. Buying leads to a more long-term commitment that will tie you to a specific location. Selling and moving is a much lengthier and more costly process that can take longer to transition through.

Stability can also play a major role in determining whether to rent or buy. If you’re planning to start a family and settle down, buying is a much better option to provide a more stable environment for your family and even yourself. Renting leads to more instability for children as there can be lots of moving and changing schools. Community ties are also impactful. If all your family and friends are located in a particular area with higher home prices, you might not be able to afford to buy a home near them and would have to rent, instead of moving elsewhere that is more affordable. Again, it’s not all about the finances. Your happiness is important when making this decision.

What Makes More Sense

After going over the pros, cons, and factors involved in renting vs. buying, you’ll now want to consider what makes more sense for your situation. Some things to think about include how long you want to live in an area, your income and credit, the housing market, and other relevant aspects. Renting would be more suitable for those who are living in a particular place for a shorter time frame and want more flexibility. It’s also helpful if you’re unfamiliar with the area and want to see more homes and neighborhoods. Financially, renting is better for those with unstable incomes and poorer credit, and it serves as a buffer during unfavorable housing market conditions for those looking to buy.

Buying, on the other hand, is more suitable for the long term. It’s better when you have good credit and a stable income that allows you to afford the down payment, closing costs, mortgage, and other additional costs associated with purchasing and owning a home. Even if you are good financially, you’ll still want the housing market to be in a favorable condition, and you’ll want to make sure you’re not overpaying. If you have the desire to build equity and invest in a place, then buying is right for you. Each payment contributes to ownership rather than rent. You can invest in your home, gain more value, and continue to build your net worth.

Ultimately, there is no right or wrong answer. This is a personal decision that requires you to look at different aspects of your life (finances, lifestyle, job, goals, etc.) and come to the decision that you feel happy and comfortable making. You’ll want to ask yourself what level of commitment you are ready for. Stay informed of any changes that may affect your financial life by working with a financial advisor. Renting or buying can be complicated. You don’t have to do it alone. If you need assistance with renting/buying as part of your overall financial planning, please reach out to our team.