Is It Smarter To Rent or Buy a Home?

Couple looks at paint samples in their new home.

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.

Market factors

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.

Personal factors

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 rentingCons of renting
Flexibility to move at the end of your leaseLack of home equity and tax benefits
Lower upfront costsLess control over your living space
No responsibility to cover repairs and maintenanceRent can keep increasing
Predictable monthly home expensesYou could be evicted
No property taxesPotential 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 buyingCons of buying
You can build equity and tap into it if neededLess flexibility to move
Greater control over your living spaceYou need to save for a down payment and closing costs
Stable monthly mortgage payments over the long term with a fixed-rate loanYou’re responsible for covering home maintenance and repairs
Tax benefitsTime spent on property upkeep
You can improve your credit by repaying the mortgageProperty taxes and HOA fees (if applicable)
Potential appreciation in home valuesRisk of foreclosure and losing your home
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