Choosing where to live is one of the most impactful decisions we can make. One of the biggest parts of deciding where to hang your hat is determining whether you want to rent or buy. It’s a big decision, but once you know the pros and cons of each, and take a good look at your specific situation, making the call will be a lot easier.
Pros / Cons
Renting
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Pros |
Cons |
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It’s easier to pick up and move. |
You are building someone else’s equity and wealth instead of your own. |
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The landlord will probably pay for most repairs and maintenance. |
Limited ability to customize your living space. |
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No expensive closing costs, property taxes, HOA fees, home insurance or mortgage insurance. |
Your rent payment could get more expensive. |
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You can try out different types of places more easily. |
Your landlord could decide to sell the building or stop renting. |
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Predictable monthly costs. |
Since the building is someone else’s and the price can change at the end of every lease period, you may have less of a sense of stability or permanence. |
Buying
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Pros |
Cons |
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You get to build equity and wealth for yourself instead of a landlord. |
Buying a home means expensive closing costs, property taxes, and home insurance. And often HOA fees and mortgage insurance. |
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The value of your home may increase with time. |
You are responsible for home repairs and maintenance. |
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Unlimited ability to customize your home. |
If it is a competitive market, purchasing a home can be harder and more expensive. |
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Potential tax benefits. |
It will be more complicated and expensive to move. |
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A sense of stability and permanence, as well as pride of ownership. |
There is the possibility that your home value could decrease. |
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Tax benefits could be reduced with new legislation. |
How to Determine What’s Best for You
Listing the pros and cons is a helpful place to start, but to make a decision, you’ve also got to take a look at how they apply to your particular situation.
Be Real About Your Finances
The first step is to take a good look at your financial situation – consider all the variables.
- Your Income
Is it sufficient and is it reliable? Homeowning means occasional unexpected large expenses. Also, lenders will want to see that you are not a risk for failure to repay your mortgage. - Credit Score
An insufficient credit score could affect your ability to get a decent rate on a mortgage, or even receive a loan at all. - Savings
Purchasing a home requires a down payment, typically between 3% and 20% of the purchase price, in addition to a handful of other up-front expenses, typically costing several thousand dollars. After buying, unexpected repairs or other expenses may pop up. - Debts
Typical wisdom is that debt payments should not comprise more than 36% of your monthly expenses. If you are near or above that, you may want to work on reducing your debt before purchasing a home.
- Other Expenses
You should also take a look at your other expenses. Look at everything – car insurance and payments, medical bills, school tuition, pets, grocery bill, etc. Don’t forget to include them when calculating what you can afford for housing.
Local Costs of Renting vs. Buying
In some places the costs of renting and buying are very similar; in others one may cost significantly more per month than the other. Make sure you are comparing apples to apples. Comparing the rent of a cozy apartment to a mortgage payment on a 3 bedroom house is not going to give you a clear comparison. An experienced Realtor can help you determine which is more affordable in your area. If you want a broad strokes picture before meeting with an agent, there are also online calculators, like this excellent one from NerdWallet.
How Long Do You Plan to Stay?
- Generally speaking, if you purchase a home, you should plan to stay there for at least two years. This gives you time to recover closing costs and distribute them over a longer period of time, as well as hopefully give your home a little time to increase in value.
- If you sell your home 2 years or less after buying it, you will also be subject to capital gains taxes on the proceeds of the sale.
- Think about your plans for the next few years. Is the house you want to buy now still going to be suitable for a couple of years? Maybe you’re planning to have children soon, start a job working from home, or adopt a pet. Any of these may change what type of home you will need.
Some Other Numbers to Crunch
- Full Costs of Ownership
Besides your monthly mortgage payment, you will be responsible for property taxes, repairs and maintenance (figure 1% of the home’s value per year), and occasional upgrades. You may also need to pay HOA fees or mortgage insurance. - Making Your Money Work for You
For many, buying a home is one of the best ways to begin building wealth. For those who live in a place where property values are stagnant or declining, or for someone who is working on building credit or otherwise not ready to buy, investing in a diverse portfolio may be a better way to put their money to work.
Don’t Discount Your Gut Instinct
Evaluating your situation and crunching the numbers is very important. But once you’ve done so, don’t discount your feelings about it! Your living situation is a financial decision, but it’s also deeply personal.
Whether you decide to rent or buy, Inhabit Real Estate Group is here for you! Talk to one of our experienced agents today about all your real estate questions.
