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At some point, you’re likely to rethink your living situation. Maybe you just want a space to call your own. Or perhaps you enjoy the perks of renting and simply want a less expensive place.
As you decide whether you should rent or buy, it’s important that you carefully consider your finances and lifestyle goals to decide where you’re best served.
Here’s what you need to know when it comes to renting or buying a house:
Pros and cons of renting
Depending on where you live, renting can come with certain benefits, including fewer recurring homeownership costs, flexibility in your living situation, and the fact that you don’t have to worry about maintenance.
However, there are some drawbacks to consider.
- It can be less expensive: Buying a home can be expensive upfront, as you have to cover the down payment and closing costs. When you rent a home or an apartment, you won’t have to worry about property taxes, HOA fees, or mortgage interest either — those costs will likely be factored into your rent by your landlord.
- It’s more flexible: Renting can offer a more flexible lifestyle, allowing you to change situations with minimum fuss. As long as you meet the terms of your lease, you might not even need to pay a large amount to break your lease. In some cases, even if you do have to pay to leave earlier with a rental, it’s likely less than paying seller costs — and it usually takes less time.
- You won’t have to worry about maintenance: When you rent, you’re not responsible for ongoing maintenance and repairs. If something breaks, the landlord fixes it. When there is maintenance on the building or grounds, someone else handles it, and pays the cost.
- You’re not building equity: When you rent, you aren’t building ownership in the home or apartment. Instead, your rent goes to help someone else build equity. If you’re interested in building equity in a home or other property, you need to buy.
- Your rent might go up: When you have a mortgage, especially if you have a fixed rate, you don’t have to worry about your payments increasing. When you rent, though, the landlord can raise the rate, and you’ll have to pay it or find someplace else to live. According to a recent rent report from Apartment Guide, the national average for rent on a two-bedroom apartment rose from $1,854 in 2019 to $1,909 in 2020.
- You can’t fully customize your space: Your living space isn’t completely your own when you rent. If you want to make big changes, you need to get permission from your landlord. Additionally, if you do make substantial improvements with permission, the landlord reaps the long-term financial benefits of those upgrades.
Pros and cons of buying a home
Before you decide to rent, you should also consider the advantages of buying a home. Consider the fact that your home can be an appreciating asset, you have full control over your space, and you might even have access to tax benefits.
Of course, as with renting, there are some disadvantages to consider as well.
If you’re considering a home purchase, be sure to shop around for a great rate. Credible makes this easy — you can compare all of our partner lenders and see prequalified rates in as little as three minutes.
- You’re building equity in a potentially appreciating asset: As you make mortgage payments and your home goes up in value, you build ownership, or equity, in your home. Later, you can borrow against your equity to reach other goals. And, if your home has risen enough in value, you’ll receive a large chunk of capital when you sell, which you can use to buy another home or put toward another major investment like retirement.
- Your space is all your own: Because you own the home, you can make improvements and upgrades. The space is entirely your own, and you can customize it as you like. When completing major projects, however, you might need to get the proper building permits, depending on the requirements of your local area and homeowners association.
- You’ll probably enjoy tax benefits: If you itemize your deductions on your tax return, you can usually claim a portion of the mortgage interest you pay each year. This includes interest paid on home equity loans or lines of credit used to improve the home. You can also typically deduct a portion of property taxes.
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- You’ll need to pay a lot upfront: The average down payment in the United States is roughly 5% to 6%, according to HousingWire, which means you’d need $18,000 to buy a $300,000 home. You might also need to pay some closing costs for your home loan, and those typically run about 2% to 5% of the home’s price. Plus, if you don’t put 20% down, you’ll have to pay private mortgage insurance.
- You’re responsible for maintenance: You have to take care of all the maintenance costs, as well as any repair costs that come up. Some experts recommend that you budget 1% of your home’s purchase price for maintenance and repairs each year. On a $300,000 home, that means setting aside $3,000 annually.
- Your home could decline in value: While homes generally appreciate in value over time, there’s always the chance that it might decline, depending on where you live. If there’s a market crash right when you need to sell, you could end up losing money. Even if your home does appreciate in value, it might not actually appreciate enough to make up for the total you’ve paid in interest, taxes, homeowners insurance, and repairs over the years.
When it makes sense to rent
Because of the flexibility of renting, and the low upfront costs involved, as well as fewer responsibilities, some people prefer to rent versus buy.
Here are some situations in which renting might make more sense:
You’re going to be moving around
If you know you’re going to move around frequently, it makes more sense to rent than to buy.
One rule of thumb is that you should plan to be in a home for at least five years if you buy it. The median time for homeownership in the United States is 13 years, according to the National Association of Realtors.
You’re paying off debt
Consider getting rid of high-interest credit cards and personal loans and then start saving for a down payment.
You’re already budgeting for another big expense
Review your financial priorities. Do you have other goals you’re working toward that you feel are more important? This might be putting more money into a retirement account, saving up for a vehicle purchase, or preparing for a wedding.
When it makes sense to buy
When deciding if you should rent or buy a house, it might be a good idea to buy if you want more freedom to customize the space and if you’re interested in building equity in a home.
You plan on staying put
If you know you’ll be around for a while, buying makes more sense. Depending on the area, your monthly mortgage might cost less than rent.
On top of that, if you’re interested in a stable home situation, especially if you’re raising a family, buying can provide a way to get that continuity.
Learn More: How to Know If You Should Buy a House
You want the freedom to renovate your space
When you’re a project-oriented person, or you like the idea of being able to customize your home, buying can make sense. Homeownership gives you control to make your home as comfortable as you like.
You can even refinance your home to pay for improvements should you so choose.
You’re financially ready for homeownership
Review your finances. If you can comfortably afford the down payment, closing costs, and monthly payments, homeownership could be well within your reach.
Here are some of the signs you might be financially ready to buy a home:
- Stable income: If you’ve had a stable income for two or more years, you might be ready to handle the ongoing costs.
- Savings: With a bigger savings account, showing that you have reserves available to handle unexpected repair costs, you can show readiness.
- Debt is under control: Even if you have a little bit of debt, it should be under control and payments should be manageable. The less high-interest debt you have before going into homeownership, the better off you’re likely to be.
- Good credit score: A good credit score can save you money on your mortgage, and it indicates that you have experience managing credit. If you have a good credit score, you might be ready to buy a home.
If you’re looking for a home loan, Credible can help you compare mortgage rates from multiple lenders. Use the table below to see prequalified rates from our partner lenders.