Homeownership has long been a sign of success, but comparing renting to buying isn’t all that clear cut. Renting is less capital intensive, and it gives you the freedom to move when you please. But buying a home will help you build equity and wealth.
There are many financial implications and lifestyle factors you should consider when you’re making the choice of whether to rent or buy. Learn more so you can make the best decision for you.
Key Takeaways
- Buying a home involves significantly higher initial costs and heftier ongoing expenses for repairs, maintenance, and property taxes.
- Renting a home doesn’t give your money a chance to grow unless you save or invest that which you aren’t paying on the higher costs of homeownership.
- Renting vs. buying isn’t a once-in-a-lifetime decision. You can revisit the question at any time if you experience lifestyle or financial changes.
- Calculate your price-to-rent ratio to figure out which is the best financial option for you at any point in time.
Renting vs. Buying a House
 RENTING VS BUYING
COSTS: Cheaper upfront costs and your deposit may be returned Higher upfront and ongoing costs
WEALTH: No opportunity for wealth accumulation Opportunity for wealth accumulation and tax breaks
RESPONSIBILITY: The renter is not responsible for maintenance The buyer is responsible for maintaining the home
FLEXIBILITY: Freedom to move Freedom to remodel at will
Cost Factors
You’re not only responsible for your monthly mortgage payment when you’re a home owner. You have to pay for repairs, maintenance, taxes, home owner’s insurance, upgrades, and possibly HOA fees. These additional costs can easily make owning a home more expensive than renting, and not all home-related costs build equity. Renters are generally responsible for only rent and utilities. The property owner is responsible for everything else.
The upfront costs of renting and buying are dramatically different. You may have to pay an application fee and security deposit to move in as a renter. Buying a home means a much more significant down payment, origination fees, closing costs, taxes, and other expenses.
Building Wealth
You’ll build equity in your home as you pay down your mortgage balance. Equity also increases as your home value goes up due to your local real estate market. Home equity adds to your net worth and can serve as collateral for a loan or line of credit if you need to borrow money in the future.
Note
Gaining equity through appreciation isn’t guaranteed. Home values can decline. You can even end up owing more than your home is worth in some cases.
Homeowners who itemize their tax deductions may be able to reduce their income tax bill by deducting the mortgage interest they paid, but you must itemize to claim this deduction. You can deduct home mortgage interest on the first $750,000 of indebtedness, or $375,000 if you’re married and filing a separate tax return.1
Wealth building isn’t impossible for renters, but you’ll need another plan. You can increase your net worth by consistently investing the difference if renting is less expensive than buying.
Responsibility for Repairs and Maintenance
Owning a home is a major commitment. Ryan McCarty, CFP and owner of McCarty Money Matters, says the first question he asks young buyers is whether they’re ready for the responsibility. You’re fully responsible for maintenance and upkeep as a homeowner, whether that means doing the work yourself or hiring a professional.
Your landlord will handle the bulk of the maintenance and repair needs if you rent. But the landlord will require you to pay for the damage in most cases if you’re the one who caused it.
Flexibility To Make Changes
Renting is a more flexible option if you think you might want to move in the future. You can move at the end of your lease, or you can break your lease and pay any fee that’s called for in your rental agreement if your job changes or you want to relocate.
But renting generally means that you have to accept the space as is. You don’t have much flexibility to make cosmetic changes to the premises. You have creative freedom over your living space as a homeowner. You can paint, redesign, or remodel the interior however you like without anyone’s approval or consent.
Homeownership doesn’t provide much flexibility when it comes to relocating, either. You’d have to sell or rent your home, or even leave it vacant. But homeownership does protect you from the risk and consequences of eviction. And you have full control over when you leave the home, if ever, McCarty notes, assuming you don’t default on your mortgage.
How To Decide If You Should Rent or Buy
Understanding how both renting and buying will impact you financially is a major part of making the decision. Comparing your local market rent to your estimated mortgage payment can give you an idea of which option is better for you.
Calculate Your Monthly Payment
Your monthly mortgage payment will depend on your home price, down payment, loan term, property taxes, homeowners insurance, and interest rate on the loan (which is highly dependent on your credit score). Use the inputs below to get a sense of what your monthly mortgage payment could end up being.
ENTER HOME PRICE
$
ENTER DOWN PAYMENT
$
%
SELECT LOAN TERM
30 years
20 years
15 years
10 years
ENTER APROr Use Credit Score For Estimate
%
OR
Your Credit Score
760-850
700-759
680-699
660-679
640-659
620-639
+ MORE OPTIONS
MONTHLY PAYMENT
$ 1,949.63 /month for 30 years
Monthly Payment
$1,949.63
Principal & Interest
$ 1,564.96
Property Taxes
$ 256.67
Homeowners Insurance
$ 128.00
Mortgage Size$352,000.00
Mortgage Interest*$211,385.63
Total Mortgage Paid*$563,385.63
*Assuming a fixed interest rate. A variable rate could give you a lower upfront rate.
EXPAND
Calculating your price-to-rent ratio can help you determine whether it makes more financial sense to rent or to buy. You can calculate your price-to-rent ratio using the formula below from the National Association of Realtors:
median home price / median annual rent = price-to-rent ratio
Buying is the better decision when the price-to-rent ratio is 15 or less. A ratio of 21 or more means that renting is the better choice because house prices may be overpriced.2
Note
A buy vs. rent calculator can help you crunch the numbers.
You can still build wealth by investing if you’re not ready to buy a home. McCarty recommends first maxing out the employer match on your 401(k) if you have one, then maxing out your Roth IRA. Finally, consider contributing to an S&P 500 fund in a brokerage account.
Purchasing a home comes with a lot of upfront expenses. It will take several years for you to break even on your costs. Staying in your home longer gives you the best chance to gain equity as you pay down your balance and the value of your home increases.
Note
You may lose money after covering the transaction costs if you have to sell your home within the first few years of ownership.
Renting offers more flexibility if you travel a lot or think you might want to relocate soon. “The world is your oyster when you rent,” said McCarty. “Live near your job so that your commute is easy. Find a nice downtown area in the suburbs that sits near the train and your favorite bagel shop.”
When To Reconsider Renting vs. Buying
It’s smart to reevaluate your living situation as your life and the real estate market change so you can be sure that your choice is still the most beneficial option. A growing family and the need for more space could be motivating factors for buying a home. Increasing rent prices or falling home prices may make buying a better choice.
Having an idea of your ideal homebuying scenario can make it easier to recognize the right time to purchase your dream home. Once you’re ready to buy, don’t delay, McCarty advises.
Frequently Asked Questions (FAQs)
What percentage of people are buying houses vs. renting?
About 36% of households in the U.S. were rentals in 2019, according to the most recent comprehensive census data.3
How do rising interest rates impact someone’s decision to buy vs. rent?
Rising interest rates lead to fewer people purchasing homes because mortgages are more expensive. They also become more difficult to qualify for.
