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Renting vs. Buying a Home: Which Is the Smarter Option?

By Fiona Tapp

  • PUBLISHED August 15
  • |
  • 3 MINUTE READ

For the first time in U.S. history, rents have reached such record highs that the average American is now spending more than 30% of their income on housing.1

Wages haven't grown at the same rate as rent increases, and low property inventory means there simply aren't enough affordable housing options on the market.1 And the situation isn't much better for home buyers, as mortgage rates are on the rise.2

So, is it better to rent or buy in such a turbulent market? We'll break down the key considerations to keep in mind when making this crucial decision, and the advantages and disadvantages of both renting and buying.

Advantages of Renting a Home

Despite what your parents might say, you're not necessarily "throwing away money" by renting. In fact, there can be big benefits to renting:

  • • One predictable price: Renting lets you carefully prepare your budget, knowing the total cost you'll pay each month for your housing without any hidden costs. Plus, your rent won't typically change during your lease, unless previously agreed.3

  • • Fewer costs: Renters don't have to pay property tax or hire a building inspector, lawyer or real estate agent. If something goes wrong in your home, like a broken appliance or a more costly repair, you won't be on the hook for additional charges. Your landlord will also have to complete the repairs promptly.4

  • • Access to amenities: Depending on the type of accommodation you rent, you may have access to special amenities like a swimming pool or gym at no additional cost. 

  • • No down payment: Although you may need to put down the first and last month's rent and a security deposit, a down payment to buy a home is considerably more, ranging from about 6% to 20% of the selling price.5

  • • More flexibility: When you rent, you only need to give your agreed-upon notice before leaving and moving somewhere else. You have the freedom and flexibility to relocate anywhere you like without having to worry about the stress of selling your home first.

  • • Lower-cost insurance: Renters only need rental insurance to cover the cost of the contents of their home, which is cheaper than policies that cover the entire property.

Disadvantages of Renting a Home

It's not all rainbows and unicorns, however. There are some possible downsides to renting:

  • • No equity or long-term investment: When you rent, you're borrowing the home. You're not building up any investment, and your payments don't go toward a purchase like your mortgage payments do.
  • • Possibility of rent increase over time: With fixed-rate mortgages, your payments won't increase for the mortgage term, but landlords may increase rent at the end of your lease.3
  • • Limited customization options: As much as you might want to make your mark, carefully check your lease agreement to see which changes to the property are permitted. Some landlords won't even let you paint, which limits your ability to make the place your own.

Advantages of Buying a Home

Buying a home has its perks. Here's what to consider before you buy a home:

  • • Fixed monthly costs: Although you'll pay property tax, maintenance, repairs and homeowner's insurance, your costs are stable during the mortgage term (provided you took out a fixed-rate mortgage). Homeowners may also find their monthly housing costs are less than if they were to rent a similar-sized property, especially in cities like New Orleans, Pittsburgh or Chicago—all of which have a low price-to-rent ratio, where buying is more favorable.6
  • • Long-term investment and equity: With every mortgage payment, a percentage of the cost goes toward your principal loan—meaning you're getting closer to owning your home outright with every payment. Although there are no guarantees, owning a home is a long-term investment with the probability of building equity and wealth through appreciation. Building equity means that when it's time to sell your home, it should fetch a greater price than your outstanding mortgage amount. This is your profit or "equity."
  • • Tax benefits: When you own your own home, you're able to deduct your mortgage interest and property taxes from your taxable income.7

Disadvantages of Buying a Home

Before you start scrolling the real estate listings, take a look at some possible downsides of homeownership:

  • • Higher up-front costs: Home buyers face many initial costs before they even move in, including a deposit, lawyer fees, home inspection fees, real estate transfer taxes and other closing costs.
  • • Hidden costs: After you've signed the papers, homeownership comes with ongoing costs like maintenance and property taxes. Though the exact amount depends on the size and condition of the property, experts suggest you save between 1% to 3% per year of your home's value for maintenance and repairs.8
  • • Less flexibility: Once you own a home, you have less flexibility to start over somewhere new. Of course, you can still move, but selling your property or renting it out while you're away is an added consideration you wouldn't have to worry about if you rented.
  • • Possibility of mortgage payment fluctuation: You'll need to pay attention to the renewal date on your mortgage, and remember that your mortgage payment may change based on interest rates (particularly if you go with a variable rate), which you have little control over—even if you move to a different lender.

Is it Better to Rent or Buy a Home?

To work out whether renting or buying is the best option for you and your situation, calculate the total cost of homeownership, including:

  • • Mortgage payment
  • • Property tax
  • • Insurance
  • • Maintenance and repairs

Add the one-off expenses you'll need to buy a home, like realtor fees, home inspection fees and a down payment.

You can directly compare this amount to the cost of renting in your area, remembering to also include the cost of your security deposit and the first and last month's rent.

Renting Vs. Buying a Home: The Bottom Line

Whether you decide to purchase a home or continue renting, there's no doubt that housing costs take up a big chunk of your monthly expenses. To help you make the right decision, take a look at your budget and include all the associated costs of both options. Although rent is a consistent fixed payment and is usually less than a mortgage payment, over time, homeowners can build equity, and their interest costs will fall as the mortgage is paid down.9

There's no one-size-fits-all answer to the question of whether to rent or buy a home—the choice ultimately depends on your unique circumstances and priorities. Go with what works best for you and your budget!

 

Fiona Tapp is an award-winning writer. Her work has appeared in The Globe and Mail, The Washington Post, The Atlantic, The Sunday Times and others.

 

READ MORE: How to Save for a Down Payment in 2023

 

Sources/references

1. Chen, L. and Le, M. Key Takeaways from the 4th Quarter Housing Affordability Update. Moody's Analytics. Published January 19, 2023. Accessed June 12, 2023.

2. Ostrowski, J. Latest mortgage news: Rates approach 7% as economy holds strong. Bankrate. Published July 5, 2023. Accessed July 10, 2023. 

3. O'Connoll, A. Rent Increases. Nolo. Updated May 11, 2023. Accessed May 23, 2023. 

4. Tenant Rights 101: What Tenants Need to Know. Rocket Lawyer. Updated April 19, 2022. Accessed May 23, 2023.

5. Lautz, J. Tackling Home Financing and Down Payment Misconceptions. National Association of Realtors. Published January 7, 2022. Accessed May 23, 2023. 

6. Ramaswamy, S.V. Is it better to rent or buy? The best house prices vary city to city. USA TODAY. Updated May 17, 2023. Accessed May 23, 2023. 

7. Nowacki, L. The 2022 Mortgage Interest Deduction: Your Guide To Limits And Qualifications. Rocket Mortgage. Published March 28, 2023. Accessed July 10, 2023. 

8. O'Brien, S. Homeowners spent up to $6,000 on average on repairs and maintenance in 2022. Here's how to keep those costs down. CNBC. Published January 5, 2023. Accessed May 23, 2023. 

9. Porter, K. How to build equity in your home. Bankrate. Published March 7, 2023. Accessed July 10, 2023.