Homeownership has long been part of the American dream and comes with many perks, such as the opportunity to build equity and tap into it. However, renting a home has its benefits, too — like lifestyle flexibility and fewer responsibilities. So, is renting or buying better?
If you’re trying to decide whether to buy or rent a home, the answer really depends on a variety of factors related to the market, your personal preferences, and your financial situation.
When Does It Make Sense To Buy a Home?
Buying a home can be a smart move when the circumstances are right. Some factors — like the housing market — are beyond your control, while others have to do with how you handle your money. These factors include your credit history and savings, which you can work on.
The housing market moves in cycles, and interest rates can go up or down depending on the state of the economy. When interest rates drop, it becomes cheaper to borrow money and buy a home. That’s because your mortgage rate affects your monthly payment and how much interest you pay in total. Depending on the details of your purchase, a difference of 1 percentage point in your interest rate could save you up to tens of thousands of dollars over the life of your loan.
Buying a home can also be more affordable than renting from the perspective of your monthly budget. The average monthly rent in the U.S. increased by approximately 15% between February 2021 and February 2022, according to real estate platform Redfin. Getting a fixed-rate mortgage allows you to lock in monthly principal and interest payments that won’t change during your loan term. After a number of years as a homeowner, you can start to reap monthly savings compared to renting.
The market is only part of the equation when you’re figuring out whether it’s the right time to buy a home. Look over these personal considerations, and see if they apply to your situation:
- Are you ready to put down roots? Buying a home can make sense if you’re planning to live in the same place for a while, but renting might be a better idea if you need the flexibility to move on short notice. At the very least, you’ll want to stay long enough to recoup your closing costs.
- Do you have enough savings for a down payment? At minimum, you’ll likely need at least 3% of your target home purchase price saved up. (And don’t forget to account for closing costs.)
- Can you afford the monthly payment and other home expenses? Your monthly payment includes mortgage principal, interest, taxes, and insurance. You’ll also need to budget for utilities, home maintenance, and homeowners association fees if applicable.
- Is your credit score in good shape? Generally, the better your credit, the lower the interest rate you can score.
The Pros and Cons of Renting vs. Buying a Home
To decide whether you should rent or own a home, get to know the trade-offs of each choice and see which one appeals more to you.
These are some of the advantages and disadvantages of renting a home:
The Pros and Cons of Renting a Home
|Pros of Renting||Cons of Renting|
|Flexibility to move at the end of your lease||Lack of home equity and tax benefits|
|Lower upfront costs||Less control over your living space|
|No responsibility to cover repairs and maintenance||Rent can keep increasing|
|Predictable monthly home expenses||You could be evicted|
|No property taxes||Potential restrictions on pets|
Is buying really better than renting? Here’s a look at some benefits and drawbacks of buying a home:
The Pros and Cons of Buying a Home
|Pros of Buying||Cons of Buying|
|You can build equity and tap into it if needed||Less flexibility to move|
|Greater control over your living space||You need to save for a down payment and closing costs|
|Stable monthly mortgage payments over the long term with a fixed-rate loan||You’re responsible for covering home maintenance and repairs|
|Tax benefits||Time spent on property upkeep|
|You can improve your credit by repaying the mortgage||Property taxes and HOA fees (if applicable)|
|Potential appreciation in home values||Risk of foreclosure and losing your home|