Buying a Home vs. Renting a Home

Buying a Home vs. Renting a Home
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Renters often hear that they’re “throwing their money away” on rent. But there are some disadvantages to homeownership that renters don’t face. Before you start saving for a downpayment on a home, it’s important to look at the financial pros and cons of both renting and buying.

Differences Between Renting and Buying

Many consumers kick off adulthood by renting a place. This could be an apartment in college or a shared house with friends. Over time, renting can become expensive, as rent payments can increase from one year to the next until the monthly rent is unaffordable.

But a rental’s affordability can still beat homeownership, even if the monthly mortgage is lower than what you’re paying in rent. There are expenses associated with owning a home, including property taxes and maintenance, that you won’t have if you rent. You may also simply decide you like having someone else responsible for any problems that come up with the home.

Up-Front Costs: Renting vs. Buying

There's a difference in renting and buying before you even move in. Buying a home means taking out a loan, and lenders require a downpayment before finalizing things. You also need to pay closing costs.

But you won’t get off scot-free if you choose to rent. Most landlords require a security deposit, which is typically the first and last months’ rent. The landlord holds the funds in an account as dictated by local laws.

Saving for a Home While Renting

One issue with renting is that it makes it tough to save for the downpayment and closing costs you need to buy a house. When you’re struggling to pay exorbitant rent each month, saving up ​3.5 percent​ of the purchase price of a new home can be tough. You also need another ​2 to 6 percent​ of the home’s value to cover closing costs, although those can sometimes be wrapped into the loan.

But once you’ve bought a home, you put yourself at an advantage with future home purchases. Assuming your property increases in value, or even remains the same, you’ll be paying down your original loan, letting you sell the home for more than you owe on it. You might even gain a bit of home equity if conditions in the housing market work in your favor. You can use that extra money for a downpayment and closing costs on a new home.

Ongoing Maintenance and Repairs

On top of the purchase price of a home, there are maintenance costs associated with it. If you’re renting and something breaks, you can simply call your landlord and ask for someone to fix it. As a homeowner, you need to either be handy at fixing things yourself or you need a list of go-to repair services to help.

Here are just a few of the home maintenance expenses associated with homeownership.

  • Lawn care and landscaping​: If you buy a condo or a house in a community that provides it, you may be able to skip this expense. Otherwise, you need to mow the grass every week or two, as well as take care of other landscaping duties. You can pay someone to do this, but it adds to your monthly budget.
  • Appliance repair​: Occasionally, one of your appliances will malfunction. You have to either repair or replace these items at various intervals. You may also want to invest in periodic maintenance on vital systems like your heat and air conditioning.
  • Pest prevention and treatment​: Insect issues can vary from annoying to dangerous. Termites can permanently damage the structural integrity of your house, but you can also have ant infestations and other nuisances. A pest control company charges a fee for prevention and treatment.

You also need to regularly replace the air filters in your heating and cooling system, as well as clean your dryer hose and vent periodically. These are all tasks likely handled by a renter’s landlord.

Tax Benefits: Buying vs. Renting

If you’re a renter, you may be aware that homeowners get certain tax benefits that you don’t. You can claim a full tax deduction on the mortgage interest up to a certain limit. Your mortgage balance must be ​$375,000 or less​, or ​$750,000 or less​ if you’re married filing jointly, to take the full deduction.

There is one exception to this. If you use your rental home for business, you’re eligible for the same home office tax deduction homeowners get. You’ll only be able to claim the portion of rent and utilities for the portion of your home you use for business.

Credit Benefits: Buying vs. Renting

Building a credit score is important for your future opportunities. But which will push your credit score ahead faster, buying or renting? Obviously, if you make your monthly rent or mortgage payment on time each month, your credit score probably benefits, but does one beat the other?

When you pay your rent on time, it will likely be reported to the credit bureaus, gradually boosting your score. One downside of buying is that when you take out a mortgage, your score will see a slight dip, but then it moves upward again as you make monthly payments. The worst thing you can do to your credit, in either case, is consistently make late payments or miss payments altogether.

Property Taxes vs. Rent Increases

Homeownership comes with property taxes. While you’re paying a mortgage, this expense is built into your monthly payment. Your lender put the funds in an escrow account and makes the payments to your local tax authority when they’re due. If you pay your house off, you’re responsible for making that payment, including any increases.

You won’t pay property tax directly if you rent. The property owner is responsible for paying those. But if property taxes increase, the increase will likely be passed on to you anyway in the form of a rent hike.

Interest Payments vs. Rent Increases

With a rental, you won’t have to worry about taking a loan to pay for your housing. You simply move in and start paying rent. But mortgages require that you get the approval of a lender, pay a downpayment and repay that loan in monthly installments throughout your time in the house.

A large chunk of your monthly home loan payment will be interest. Mortgage interest is the fee your lender charges in return for letting you borrow the money. In the early years you’re in your new house, most of your mortgage payment goes toward interest, but as you pay off more of the loan amount, you’ll be putting more toward the principal.

Homeowners Insurance vs. Renters Insurance

Homeowners insurance is also part of your monthly mortgage payment. Your lender puts the money in escrow and pays your insurance company. This insurance covers any damage or loss to your home due to fires, hail, ice and other disasters, as outlined in your policy.

As a renter, though, you still need insurance. Many landlords require you to provide proof of renters insurance before you can move in. This insurance covers the contents of your rental property if you suffer loss or damage. The external structure is covered by the property owner’s policy.

Homeowners Association Fees

If you buy a home, it’s important to be aware if it's part of a homeowners association (HOA) or condo association. Typically, HOAs charge monthly membership dues that can range from a few bucks a month to hundreds or even thousands. This fee is usually disclosed in real estate listings, along with other expenses associated with the house.

There are plenty of houses that aren’t part of an HOA, but HOAs do come with benefits you don’t get otherwise. Your landscaping and lawn care may be included as part of your fee. HOAs also set guidelines for upkeep of the neighborhood that can protect the value of your home. These are all things to consider if you prefer to avoid that HOA fee.

Buying a Home as Investment

The biggest benefit of buying a home is that you’re making an investment. In most cases, real estate appreciates over time, although the real estate market often fluctuates. If you buy a house now, then sell it ​10 or 20 years​ down the road, it will likely be worth more than the purchase price you originally set on it.

For best results, though, you need to stay in the house for at least a few years. The closing costs you pay won't be recouped, so if you move again in a couple of years, you lose that money. You also might not have enough equity in your house to pay off your loan without owing some money on it.

Lease Restrictions When Renting

One negative of renting is that you’re bound by your lease. That means if you ever want to move, you’ll likely have to wait until your lease expires to avoid paying a penalty. Unless you live in an area with rent controls, your landlord also can increase your rent from one year to the next, leaving you scrambling to either find somewhere else to live or find extra money in your budget.

Your lease also limits any renovations you can make. You can’t paint the walls or change out the flooring, obviously, but you also have to be careful not to damage anything. You typically pay a security deposit when you move in, and that deposit is withheld if your landlord has to put money into repairing walls, flooring or anything else you damaged during your stay.

Permanence of Homeownership

One thing that keeps many renters from buying a home is the commitment it brings. According to the National Association of Realtors, the average duration of homeownership in the U.S. is ​13 years​. But in some areas of the country, ​eight years​ is the median stay. The problem with moving too soon is that you might not have paid down enough of the loan amount to sell it for more than what you still owe on it, leaving you in a bind.

But despite your best efforts, things can happen. Your financial situation may change, leaving you unable to afford the monthly mortgage payments. Your company could go out of business or relocate you, forcing you to move to another area to get work. Renting gives you a little more flexibility, requiring you only to pay to get out of the lease versus possibly taking a loss on your home.

Although homeownership comes with many benefits, there are also situations where renting makes more sense. It’s important to weigh all the financial aspects of renting versus buying, look at your budget and make the decision that works best for you and your household.