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Should you rent or buy a home? How to decide.
Renting a home can be expensive. In recent years, more people than ever have been putting a hefty chunk of their income toward rent and utilities.
On the other hand, buying a home can also prove costly and even feel financially out of reach.
With both rent and home prices causing sticker shock, which is the better choice? If you can buy a house, should you?
Read more: Best time of year to buy a house
Buying vs. renting: Which do you prefer?
Before you try to decide whether to buy or rent, you might want to ask yourself an even more important question: Do you want to be a homeowner?
People generally buy a home because they need more space, are excited about making home improvements, want their children to attend a specific school, or hope to build equity — even wealth — over time. Yet other people still prefer to rent, perhaps because it allows them more flexibility to move, or they aren't willing to make the financial commitment of owning a home.
If you're excited about the advantages of owning, you may be ready to explore this option further.
Learn more: Should you buy a house? How to know if you're ready.
Rent or buy: 4 questions to ask yourself
Being enthusiastic about buying may mean you're emotionally ready, but are you financially ready to buy a house, as well? To figure that out, you'll need to ask yourself four important questions.
1. Do you have a strong financial history?
To be approved for a mortgage, you'll have to demonstrate to the lender that you're financially responsible and have the ability to make a home payment every month. If you earn a regular, ongoing income from a job or contract work and your credit history is good (or better), you may be a solid candidate for obtaining a mortgage.
Tip: You don't need perfect credit to be approved for a mortgage, but a higher credit score may help you qualify for a lower mortgage rate.
2. Can you afford the hidden costs of owning a home?
Your monthly payment toward the principal and interest is just one of the costs of owning a home.
Other typical expenses include:
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Property taxes
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Homeowners insurance
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Utilities
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Homeowners' association dues
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Maintenance costs, such as tree trimming or snow removal
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Home repairs, such as new appliances or a roof replacement
These costs vary depending on where you live and the size and type of the home.
Utility bills for a home you own may be substantially higher than those you pay for a rental.
Opening a savings account specifically for household expenses might help you plan for these additional costs.
3. Could you benefit from homeowner tax deductions?
If you itemize your deductions when you prepare your income tax returns, you may be able to deduct mortgage interest, property taxes, and other costs you covered over the year. These deductions might help you save money at tax time and partially offset the costs of owning your home.
Learn more: 12 questions to ask when buying a house
4. Do you plan to live in your home for at least a few years?
When you buy a home, you'll likely have to pay closing costs to complete the transaction. These costs may include mortgage origination fees, title search and insurance fees, attorney's fees, and an appraisal fee, just to name a few.
Selling can be just as expensive as your closing costs — or even more expensive — because, as the seller, you'll also be responsible for paying your real estate agent’s commission. If you plan to move within a few years, you may not own your home long enough to justify all of these costs.
Moreover, while home prices tend to go up over time, they can and sometimes do experience a stretch of decline. If prices drop after you buy, you may end up owing more than your home's worth. This situation, sometimes referred to as being "upside down" on your loan, can make moving difficult. But if you plan to stay in the home for a few years or longer, your risk of losing money on your home decreases.
Dig deeper: What to do if you have an underwater mortgage
Buying vs. renting: Which is the better fit?
Buying a home can be a life-changing experience. If it makes sense for you, emotionally and financially, you may be ready to move forward with the process. If you're not sure or you know you're not ready yet, you may want to continue to rent for a while. Either way, you can start to take steps now to increase your income, improve your credit score, and educate yourself about the joys and responsibilities of being a homeowner.
Dig deeper: What is rent-to-own, and can it help me buy a home?
Rent vs. buy: FAQs
Is it better to rent or buy nowadays?
The better choice between renting and buying depends on your finances and life stage. If you can't comfortably afford a down payment, closing costs, or monthly mortgage payments, you're probably not ready to buy yet. If you expect to move cities in the next year or two, renting is probably better for now.
What is the 5% rule for rent vs. buy?
The 5% rule is a guideline that can help renters decide if they're financially ready to buy a home. According to the 5% rule, you can afford to buy a house if the annual cost of homeownership — including everything from monthly mortgage payments to repairs — is less than 5% of the sales price. The 5% rule can be a helpful tool for deciding whether you're ready to buy, but remember that it's just a rule of thumb. It's possible you're still ready to be a homeowner if your yearly costs exceed 5% of the purchase price.
Do billionaires buy or rent?
Keep in mind that everyone is different. However, some wealthy people choose to rent even though they can afford to buy. Then they put their money into other types of investments. Owning a home can be a great way to build wealth, but it isn't the only option.
