Renting vs. Buying a House: Advantages & Disadvantages
For many, buying a home is the ultimate dream. You may have been browsing Zillow, attending open houses, and toying with ideas of homeownership.
While there are definitely downsides that come with renting, buying a home is a major decision—and it’s probably the biggest financial decision you’ll ever make. Before you take on that responsibility, it’s important to make sure that you’re truly ready for that commitment.
Are You Ready to Be a Homeowner?
Homeownership comes with a myriad of additional responsibilities and long-term commitments. The financial responsibilities alone include expenses like home maintenance, property taxes, homeowners insurance, and repairs. Buying a home means you’re planning to stay in a location with some permanence, and accepting a new job in a different state or even traveling and going abroad for a year becomes significantly more complicated when you’re a homeowner. The sheer time commitment of home maintenance chores, like painting, yard work, and basic DIY-friendly repairs can quickly eat into your free time, too.
If you’re thinking about buying your first home, carefully consider not only your current lifestyle and financial stability but also where your life is likely to take you in five years. If you’re not yet sure that you want to stay in your location long-term, then buying a house could leave you feeling tied down and restricted. If your finances fluctuate and you’re still working to build up savings and overall financial stability, buying a home and paying for the related expenses may be highly stressful. You’ll need to evaluate your life and your goals to determine if you are ready to be a homeowner, or if renting is a better option.
Is This the Right Time to Buy a House?
Even if you decide that you’re ready to be a homeowner, this may not be the right time for you to buy a home. Over the past few years, the real estate market has become heavily inflated. Between limited inventory and climbing interest rates, it may be better to wait until the market stabilizes before you start to shop.
In early 2020, the pandemic prompted a major lifestyle shift for much of the country. Some people lost their jobs, some worked from home, and kids transitioned to remote learning, and that uncertainty made many people hesitant to sell their homes. Simultaneously, construction supplies became limited and expensive, slowing new home construction.
Together, these factors resulted in limited inventory. That was exacerbated by a massive demand not only from first-time homebuyers but also from families who, now working remotely, had the freedom to move without being tied to their job’s location.
Because of that increased demand, home prices remain high. According to the National Association of Realtors, in September of 2022, the median sale price of an existing home was $495,000. In 2021, that price was $462,400, and by June 2022, it had climbed to $534,600.
While this data indicates that home prices are falling slightly, they remain high. If you buy a house at these high prices, you will not only pay higher mortgage payments, but you’ll pay more in taxes, homeowners insurance, and interest, too.
Mortgage interest rates are climbing, too. According to Forbes, interest rates are likely to continue to increase, and may reach 6.5% to 8% by the end of 2022. Currently, average mortgage rates for 30-year fixed mortgages are 7.25%, a stark increase compared to the 3.22% interest rate that buyers were given at the beginning of 2022. When you pair the higher interest rate with the higher home purchase prices, buying a home is a real financial challenge given the current market.
>> Read More: Interest-Free Home Financing Made Possible
While it’s possible to find and buy a home in just 15 weeks, the process can also take up to eight months. Getting pre-approved for a mortgage takes a day, then you will need to tour homes. Once you’ve submitted an offer and are under contract, plan for a 49-day period before you close on your home.
Since the housing market is so volatile right now, it’s possible that the interest rates will climb significantly during that time, and you might close at a much higher interest rate than you’d anticipated.
Can You Afford to Buy a House?
Your down payment and your mortgage payments are just a portion of the expenses that come along with homeownership. You will also need to budget for expenses like HOA memberships, home maintenance costs, taxes, and more to determine if you can truly afford a house.
One of your major upfront costs will be your down payment. While a 20% down payment is traditional and ideal, because it can lower your mortgage payments and minimize how much you will pay in interest, you don’t have to have a 20% down payment saved up to buy a house. Programs like the FHA allow you to buy a home with a down payment as small as 3.5%, while VA home loans eliminate the need for a down payment.
You will also need to be prepared to pay closing costs. These costs are typically between 2% and 5% of your total home loan. If you bought a $400,000 home, your closing costs could range from $8,000 to $20,000. While it’s most economical to pay those costs out-of-pocket, you may be able to wrap them into your home loan. Keep in mind, though, that if you wrap those costs into the loan, you will be paying interest on those costs and will increase your monthly mortgage payments.
Once you’ve paid those upfront homeownership costs, you will need to pay additional monthly expenses. Your mortgage payments are just one of those expenses, and those payments will vary depending on your home purchase price, your interest rate, and how much money you put down on the home.
Property taxes are also an ongoing expense, and their frequency will depend on your state. Many states bill you twice annually, while some states bill quarterly. You will need to be sure that you have enough money set aside to pay these taxes. Alternatively, you can wrap them into your mortgage, so you’ll technically be making monthly payments that will go toward your taxes.
You will also need to pay for your homeowners and mortgage insurance. If you put only a small amount of money down, then your lender will require you to purchase private mortgage insurance, which helps to protect the lender if you default on your mortgage. Your insurance costs will depend on factors like the value of your home, your location, and the type of policy that you choose. You can also wrap your insurance into your mortgage, so you are making monthly payments toward your policy.
If you live in a neighborhood that is part of a homeowners association, then you will need to pay monthly HOA fees. These fees help with property and common area maintenance costs, and they can vary significantly. It’s a good idea to thoroughly research the HOA fees of any home that you’re considering buying, so you know what to budget. You will usually pay these fees monthly or quarterly.
Finally, don’t forget to budget for home maintenance and upkeep costs. Typical upkeep includes landscaping, chimney cleaning, HVAC service and cleaning, and more.
>> Related read: Home Buying Questions
Do You See Your Life Changing Dramatically Any Time Soon?
Homeownership is synonymous with stability. When you buy a home, you’re essentially putting down roots in your new location. Buying a home is a very expensive process, and when you add up your inspection, down payment, closing costs, and more, you’ll find you’ve spent many thousands of dollars.
If you buy a home and then discover you want or need to move in two years, you’ll be taking a financial hit, particularly when it comes to expenses like your closing costs. It’s unlikely that your home’s value will have increased so greatly in two years that you will recoup those costs by selling your home, and that’s before you consider the time-consuming requirements of selling a home and then buying another.
Before you buy a home, think carefully about your lifestyle and how your life might change in the next 10 years. If you anticipate wanting or needing to relocate, or if you need flexibility in your payments or location, then taking out a 30-year mortgage might not be the best option.
What Are the Advantages and Disadvantages of Buying or Renting a House?
There are some distinct advantages and disadvantages to buying or renting a house. By weighing the pros and cons of each, you can determine which option makes the most sense for you.
Buying a home may be a major financial investment, but it can pay off in multiple ways, too.
>> Related read: Top 7 Reasons to Buy a Home Instead of Rent
With every mortgage payment that you make, you are building equity or the value of your home that you actually own. That equity can offer significant value that you can use when buying another home, making repairs on your home, or even if you need a large sum of money for another major expense.
As a homeowner, you are eligible for a few tax breaks, including being able to write off the interest you paid on your home and possibly deduct your private mortgage insurance.
While buying a home can be rewarding and exciting, there are also some disadvantages that come along with homeownership. It’s important to be realistic about the downsides of owning a home so you can decide if it’s the right option for you.
It’s always best to make a large down payment on your home since it can reduce your monthly mortgage payments, the amount that you pay in interest, and may even mean that you don’t need to pay for private mortgage insurance. However, a 20% down payment on even a $200,000 home is $40,000, and saving that large sum of money can be difficult.
Maintenance and Repairs
Homes require upkeep and repairs, and those costs can be surprisingly high. If you buy a home, it’s really best to have at least a few thousand dollars in a savings account that you can access for unanticipated repairs, like fixing a broken furnace or replacing a broken water heater.
While your dream may be to own a home one day, renting definitely has some advantages. You might find that renting is the right choice for you, at least for right now.
When you rent a home or apartment, you can live just about anywhere, including in expensive areas where you couldn’t afford to buy property. Renting also gives you the ability to easily move to new areas, so it’s a great choice if you enjoy exploring or often have to move for work.
When you rent, you aren’t responsible for paying for or performing maintenance or repairs. If anything breaks or needs attention, you can call your landlord or property manager and don’t have to worry about the issue further.
Renting a home or apartment has its downsides, too.
When you rent, you lack control over decisions like what type of heating system to use, how to maintain the yard, what fixtures to install, and sometimes what color to paint the walls. While you can always make requests of your landlord or property manager, at the end of the day, you lack the decision-making power that you would have if you owned the property.
Lack of Equity
Unlike when you make monthly payments and build equity in your home, your rent payments don’t build up any type of equity. It can be frustrating to know that you are paying for a property but won’t see any value back from those payments when you move.
Both renting and buying have their pros and cons, and ultimately only you can decide which option is right for you.
If you think that it may be time to explore buying your first home, the Rent vs Buy Calculator can help you to better understand the costs and determine if you’re financially ready to buy a home.
And when you’re ready, get pre-qualified today in under 10 minutes.
Originally published April 2019, updated April 2023.