Buying vs. Renting a Home: What’s the Right Decision for You?

Highlights:

• There’s no one-size-fits-all solution for choosing whether to rent or buy a home — your decision will depend on your financial situation and overall lifestyle.
• Renting offers many benefits, including little to no maintenance costs and increased flexibility for the tenant.
• Buying can be an excellent long-term investment, providing homeowners with stability and a chance to build equity over time.

There’s no one-size-fits-all answer when choosing whether to rent or buy a home. Each option involves economic, legal and financial considerations. Looking to rent or buy? Understand how your unique circumstances may inform your choice.

When to consider renting a home

Renting is sometimes considered less favorable than homeownership because it doesn’t allow a renter to build equity (the property’s market value). However, there are many reasons you might choose renting over buying.

Buying a home is a major financial commitment that can require years of saving while renting is generally more attainable in the short term. Unlike homeowners, renters are not usually responsible for the maintenance costs of the rental buildings. Sudden repairs and day-to-day tasks, such as yard work or snow removal, usually fall to the landlord.

Renting also generally provides more flexibility than homeownership. Most mortgages span between 15 and 30 years, and real estate agents generally recommend staying in a home for at least five years before selling. Renters are only locked in place for the duration of their lease, which typically spans six months to a year.

If you’re looking for an affordable alternative to homeownership or greater flexibility in where you live, renting could be a good option. Consider the following:

• Credit history. Landlords may consider a renter’s credit reports and credit scores when evaluating a potential tenant. The minimum credit score requirement for a renter varies, but landlords generally prefer to see credit scores of 670 or higher.
• Up-front costs. Renting commonly includes an application fee and a security deposit equal to one month’s rent. Under some rental agreements, you’ll be refunded the deposit when you move out, provided you haven’t damaged the property or otherwise broken your lease.
• Monthly payments. Renters owe fixed monthly payments, with no interest, to a landlord or property manager. This amount is locked in throughout the course of your lease. However, missing payments can trigger penalties and may result in legal action or eviction.
• Taxes. Renters don’t enjoy the same tax breaks as homeowners, but they aren’t responsible for paying property taxes — although your landlord may factor these costs into your rent.
• Maintenance and repair. Landlords, not renters, are generally responsible for regular property maintenance and emergency repairs.
• Insurance. Renters may purchase renters insurance, which covers damage inflicted to personal property but not to the building itself. Renters insurance is often less expensive than homeowners insurance.

Pros and cons of renting a home

Pros of renting include:

• Affordability. Renting is often more immediately affordable than homeownership and involves fewer up-front costs.
• Flexibility. Most leases range from six months to one year, allowing you to make a temporary commitment.
• Limited maintenance requirements. Landlords, not renters, are generally responsible for repair costs and the general upkeep of a building.

Cons of renting include:

• Inability to build equity. As a renter, you have no equity in your home, regardless of how long you live there.
• Limited control over your living space. Your ability to make changes to a rental property is often limited by the terms of your lease.
• Lack of stability. Landlords may choose to sell a building at any time. They can also raise your rent between leases or evict renters for breaking the terms of a lease.

When to consider buying a home

Buying a home is a huge financial investment; however, it comes with significant benefits. Buyers who can afford the up-front costs gain the opportunity to build equity over time.

Additionally, homeowners have more control over their space than renters and are usually able to make changes to the home as they see fit. Major improvements can even increase the home’s overall value. For renters, any money spent to improve your living space ultimately benefits the landlord.

If you’re looking to buy a home, consider the following:

• Credit history. Lenders consider your credit scores as one factor when evaluating you for a mortgage. The minimum requirement varies per lender, but conventional mortgages typically require credit scores above 620.
• Up-front costs. Buyers should account for a lump-sum down payment to be made as part of the purchase process. Most lenders prefer a down payment equal to at least 20% of your home’s purchase price. A down payment of less than 20% could require you to pay for costly private mortgage insurance each month. You’ll also owe various fees and taxes — known as closing costs — related to the home-buying process. Closing costs typically range from 3% to 5% of your home’s purchase price.
• Monthly payments. Mortgages require monthly payments, consisting of both principal and interest, for the duration of the loan’s term. Unlike rent, your mortgage payments end when you’ve repaid your lender in full.
• Taxes. As a homeowner, you’re eligible to receive special tax breaks, such as the mortgage interest deduction. However, you’ll also owe costly property taxes.
• Maintenance and repair. Homeowners are on the hook for both major and minor fixes, plus all day-to-day maintenance.
• Insurance. Mortgage lenders usually require buyers to take out homeowners insurance policies. Rates vary, but you can generally expect to pay between $100 and $150 per month.

Pros and cons of buying a home

Pros of buying include:

• Home equity. Buying a home is a significant investment that will hopefully increase in value over time. Your home equity builds over time as you pay down your mortgage.
• Stability. Purchasing a home is a great way to invest in steady, long-term housing.
• Customization. You’re free to change a house you own as you see fit, though you may face restrictions if you’re part of a homeowners association.

Cons of buying include:

• Cost. Buying a home involves up-front costs totaling thousands of dollars. So, homeownership is not financially accessible for everyone.
• Time. Between building your savings, house hunting and navigating the closing process, buying a home can take a significant amount of time.
• Market risk. Home appreciation isn’t guaranteed. Factors like the real estate market, the larger economy and general wear and tear can negatively impact your home’s value.

Should I rent or buy a home?

When deciding between renting and buying, your choice will be shaped by two primary factors: your financial situation and your lifestyle.

Buying a home can be prohibitively expensive for many people. Do you have enough money set aside to fund a home purchase? Have you considered related expenses like property taxes and maintenance costs? How do your credit scores look?

Also, consider your goals for the future. If you’re looking to settle in one place, buying a home could be a good long-term investment. However, if you’re in a transitional period, the flexibility that comes with renting would be a better fit.

Remember, there’s no right or wrong choice. As long as you carefully consider both renting and buying, you can settle on the option that’s right for your lifestyle.