Rent Vs. Buy A House: Which Option Is Right For You?

Renting A House

The process to rent a house is more straightforward than buying, but there are still several steps to follow. Once you find a place you'd like to rent, you must fill out a rental application to provide the landlord with your personal and financial information. If your application is accepted, it's time to sign the lease. A lease is a legally binding contract that defines the responsibilities of the renter and landlord. This includes the price of rent, who pays for utilities, the amount of the security deposit, the duration of the lease, specific rules of the house and what happens if either party breaches the lease terms.

One of the main benefits of renting a home is the lower upfront costs and flexibility. You may be starting your career and not have enough money saved for a down payment, or perhaps you want some time to live in a city before moving to the suburbs. There are many variables to consider, so it's best to have a strategy to think through your options.

Pros And Cons Of Renting

When considering whether to rent or buy a house, one of the most valuable strategies is to create a pros and cons list. Some factors you may consider are:

Pros

• No maintenance or repair costs
• Shorter term commitment
• Flexibility to move around to different locations
• Ability to live in an area you can’t afford to buy in
• Lower insurance costs

Cons

• Must follow certain rules set by a landlord (for example, no pets allowed)
• Cannot make permanent changes to the property
• No tax incentives
• Little to no return on investment
• Rent can go up upon lease renewal

Buying A House

Buying a house can involve more effort and upfront costs than renting, but the investment can be worth it to own your dream home and a valuable long-term asset. Since you are more likely to live in a home you own for longer, you will want to spend more time looking for the right home.

Getting a mortgage preapproval is one of the most critical early steps in the home buying process. A preapproval determines how much a lender is willing to lend you based on your personal and financial information. Once you know how much you can borrow, you can find a real estate agent to help identify homes that suit your budget.

If you find the perfect home, you can put in an attractive offer to the seller that fits your budget. If the offer is approved, you’ll then want to get a home inspection, take out a home insurance policy and contact the utility company to ensure your water and electricity are turned on when you move in.

Closing day is the final step in the home buying process. This is when you will sign the final documents and pay your down payment and closing fees. After you sign the dotted line and the payments go through, you get your keys and pop the champagne!

While the process of buying a house vs. renting may seem extensive at first, it is essential to do your due diligence. If you’re ready to live in a home you love and have the financial stability to manage the costs for years to come, the process will be worth it.

Pros And Cons Of Buying

You can also use a pros and cons list when considering buying a home. Don’t forget to weigh these examples before making your decision:

Pros

• Ability to build equity and get a return on investment
• Tax incentives for interest paid
• No landlord to answer to or rules to follow
• Ability to make permanent changes to the home
• Ability to achieve sole homeownership once the mortgage is paid off

Cons

• Maintenance and repair costs
• Additional costs like property tax and homeowners insurance
• Substantial upfront costs
• Market risk and worry over declining home values
• Long-term commitment

Key Differences Between Renting Vs. Buying A House

There are some key differences to keep in mind when deciding to rent or buy a home. While short-term costs and flexibility may make renting more attractive, long-term benefits may sway you to buy.

Housing Costs

While renting has lower upfront costs than buying, there are payments to make before moving in. These typically include the first and last month's rent and a security deposit to protect the landlord if you leave before the lease expires or cause damage to the home. After you move in, you must pay your rent and utilities every month, but you also may pay for renters insurance, laundry fees and parking depending on where you live.

When buying a home, upfront costs include inspection fees, appraisal fees, the down payment and closing costs such as origination fees and title insurance. Closing costs can amount to 3% – 6% of the value of your home.

After you have the keys in hand, there are ongoing costs in addition to your mortgage payment. These include property taxes, homeowners insurance, mortgage insurance, homeowners association dues and utilities. While you may not have to spend money on maintenance every month, it's wise to save money periodically for unexpected expenses.

Home Equity

Building home equity is the crucial factor of homeownership that can make the additional costs worth it. Home equity is the difference between the amount you owe on your mortgage and the value of your home. So if your home is worth $500,000 and you have $200,000 left to pay on your mortgage, you have $300,000 in home equity. Your equity increases with each payment you make toward your mortgage principal and with each year that your home value increases.

Owning such a valuable asset can benefit you in various ways. When you sell the home, you can use the proceeds for a down payment on your next home. If you'd like to stay in your home but need cash for significant expenses like a home renovation or your children's college education, you can get a home equity loan or a home equity line of credit, also called a HELOC.

Rental payments do not build home equity. They provide you housing for the term of your lease, but you do not receive the benefit of owning an asset after any of the payments.

Tax Benefits

If homeowners itemize their taxes, they have an array of tax incentives that renters cannot access. The mortgage interest deduction allows homeowners to subtract the money they pay toward their mortgage interest from their taxable income, decreasing their total income taxes. They also have access to similar incentives for home equity loans, property taxes and mortgage insurance. Since renters do not have home equity or pay property taxes or mortgage insurance, they cannot access these incentives.

Home Maintenance And Repairs

This is often one of the most surprising differences homeowners face after years of renting. When the air conditioning in a rental home stops working, you can alert the landlord or property manager, and they will take care of the rest. The issue is fixed quickly, usually at no extra cost to you. When you own the home, there is no free resource to call. If you can't fix it yourself, you can call an HVAC technician, but they're not free!

Special Considerations When Deciding Whether To Rent Vs. Buy A Home

While it's understandable to get caught up in the details of whether to rent vs. buy a home, some critical big-picture factors may make it easier to decide.

Financial Stability

It’s essential to analyze your finances and ask important questions like: How much debt do I have? Are my spending habits consistent? How much money do I have saved? Buying a home can come with unexpected costs down the road, so it's best to be prepared if and when they occur. Creating a budget is the best way to determine if you are ready to buy or rent a home. Determining what kind of home you can afford and forecasting how you'll save for the costs upfront and through the years will give you peace of mind to decide.

Location

One of the perks of renting vs. buying a house is that you may be able to afford to rent a home in an upscale location where you could not afford to buy. If you're looking for a smaller apartment close to the action in a city, renting may be right for you. If you're looking for more space in a more affordable location, try looking for a home in a lower-cost-of-living area outside a city. Where you want to live will help determine the better choice for you.

Future Plans

How far in advance you plan for your future is a significant factor in deciding to rent or buy. If you are unsure of where you want to live long term or don't know the size of the home that will be right for your family, the flexibility of renting is a perk. If you are ready to lay down roots and invest in real estate, you may be ready to buy.

FAQs On Buying Vs. Renting A House

Here are some of the most common questions when deciding whether to buy or rent a house. However, it's important to remember that the final decision will depend on your financial situation and personal goals.

When should I rent vs. buy a house?

If you plan to stay in a home for at least 5 years and have a steady income to make the necessary payments and maintain your desired lifestyle, buying a home could be highly beneficial. In addition to your steady income, ensure you have enough cash upfront to pay for a down payment, closing costs and an emergency fund. If you are undecided on your dream location or are still working on your budget, renting is an excellent option while you plan your future goals.

Is it cheaper to rent or buy a house?

It depends. In the short term, renting a house has lower upfront costs and a much lower risk of having to cover expensive repairs. In the long term, building equity in a home that increases in value allows homeowners to profit once they sell it, making the upfront and ongoing investment to buy a home more rewarding over the long term.

Is buying a house a good investment?

Buying a house is a good investment if the home buyer ensures that they can afford the monthly costs and keep an emergency fund for surprise costs. Buying a home may be one of the largest financial decisions in your lifetime, so it is vital to assess your finances beforehand and make the right decision for you and your family.

The Bottom Line

You should make the decision whether to rent or buy a home after analyzing your financial and personal goals. Look at the pros and cons of each option and consider how long you’re planning to stay in a given area. If you have found the area or home you love, perfected your budget and can’t wait to take advantage of the long-term benefits of homeownership, it's time to apply for a mortgage with Rocket Mortgage^® today.