Of all of the major purchases you might make in life, none are as important and costly as your home. Buyers have several options in the market today, and the main ones are renting and buying. Renters pay for tenancy in a home, usually on a month-to-month basis. Buyers gain ownership of a house upon purchase. Each option has its own positives and negatives, and the one you should choose depends on several factors, including your intended length of stay and your income.
While buying a home is touted as the ideal, in some situations, renting is a more appealing route. Renting is a good option because it does not demand a long-term commitment, either financially or physically. A renter can invest the money a home-buyer would need for a down payment and closing costs in other ways, allowing for more financial freedom. When you want to move, you can back out of a rental agreement or wait until your lease is up, typically less than a year.
Renting can also improve or repair your credit score, assuming that you pay rent consistently and in a timely manner. If you use a rent-reporting service, the three major credit bureaus, Experian, Equifax, and TransUnion, will be able to incorporate your record of timely rental payments into your credit report. This can help you qualify to rent a home, buy a home, or make other big purchases.
As far as the actual house or apartment goes, your responsibility as a renter is primarily paying rent. The landlord is responsible for costs like property taxes and maintenance, which further frees you to invest your money elsewhere.
The main con to renting a home is the uncertainty of tenancy. As long as you pay rent each month, you should have no trouble living in your home unless or until your landlord decides to sell it. In the event that your landlord does not close the rental relationship, they may still increase the rent in response to inflation or other economic factors.
Furthermore, by renting a home, you lose out on the financial incentives of buying a home. The money you pay for rent does not go into any long-term savings or help build your wealth the way that home mortgages do.
The instability of rental payments and uncertainty of rental renewals make the renting option less desirable than the buying option for individuals or families who intend to stay in their homes long-term or who want to make their home a financial investment.
When you buy a home, you have the opportunity to increase its value through aesthetic improvements, technology updates, add-ons, and more. In doing so, you boost the value of your home and secure a nest egg for the future: Investing in your home and making payments on your mortgage builds value that you can draw on later if needed. In this way, buying a home offers financial stability, particularly if you pay on a fixed-rate mortgage. Wealth builds over time through investment.
For homeowners, the federal government also has tax breaks in place to encourage Americans to buy rather than rent. These include a deduction for mortgage interest and a deduction for state and local property taxes. If you rent out space in your home to others, you can also claim a deduction for maintenance of the rented property.
The main drawback to buying a home is the greater cost compared to renting. Throughout the United States, homeowners pay between 33% and 93% more than renters. That many home mortgage loans are repaid over decades, sometimes with variable rates that result in much accumulated interest, further exacerbates this price difference. Thus, a home-buyer must be prepared to pay more than a renter.
Even in the beginning of the purchasing process, a buyer must have considerable financial reserves or reliable loans to cover the down payment and closing costs. Typically, mortgage lenders expect a minimum of a 20% down payment and between 2% and 5% of the purchase price in closing costs. For a $300,000 home, this works out to between $66,000 and $75,000 up front.
In addition to the mortgage, a homeowner must take on the property responsibilities that a landlord would usually carry in a renting situation, including property taxes and maintenance costs.
Given these financial considerations, buying a home is not ideal for those who are just starting out and/or have limited funds and don’t want to commit to a home long-term.