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Renting vs. Buying A House: Which is the right choice?
The decision of whether to rent or buy a home is one of the most important decisions in life. If you are considering making the move from renting to owning, than this article will help you get started.
When deciding between renting or buying there are many factors to consider
including: price of the house, proximity to work/school, length of commute,
monthly costs (condo fees vs. monthly rent), time until next pay raise (if
applicable). Once these initial basic questions are answered it is easy
determine which choice would best suit your lifestyle and budget. There are
only three determining factors that should be weighed when choosing between
renting or buying; their cost-benefit analysis comparison chart shows some but
not all of them (See figure 1).
The following is a list of five major factors in deciding whether to rent or buy a house:
1) The Monthly Cost – The monthly costs associated with renting and buying are actually very similar especially when you consider that the average American only spends 30% on housing. Renting gives the renter more flexibility in terms of budget because they can choose how much to spend on rent. If money is tight, there is no obligation to spend more than you have too. When you own a home it will be your largest monthly expense so you want to make sure that when choosing the right time to buy, when prices are low and interest rates are at their peak, which generally happens every seven years. Also factor in the monthly costs of owning a home, which are moderately high for housing expenses alone, estimated at 5-15% of your annual income.
2) The Time to Pay Off Your Mortgage – When determining how long it will take you to pay off your mortgage you should consider the time before your next raise and how much more money you can put towards your house each month. If you plan on moving up to a larger house or need to move because of another life event than that could dictate how early or late in life one should buy their first house. For example, if one plans on having children around ages 0-5 than it makes more financial sense to buy sooner rather than later because housing prices tend to go up faster than inflation. Also, if you know that you will be getting a promotion and raise soon than it would make more sense to wait on buying a house because of your increased income.
3) The Up-front Costs – When considering the initial costs associated with renting or buying there are major differences between the two. With renting, there is no down payment required and all utilities are usually included in the monthly rent such as gas, electricity, water/sewer and sometimes even cable TV. Buying comes with many initial costs including: closing fees (approx $2500), application fees (if applicable), moving expenses and first month’s full payment of mortgage principal and interest before any payments towards paying off your home.
The down payment on a house can be as low as 3% of the purchase price but
usually ranges from 5-20%. With renting there is no upfront cost to move into
your next house, you just have to give notice, clean out your old place and
4) The Freedom to Move – When considering whether one should rent or buy a home it is important to determine how easy it would be to pay off their mortgage if they wanted too. If you plan on moving around every couple years than buying a house may not make sense because you will continuously lose money because of all the closing costs each time you move. When renting a house there are no initial costs upon moving in and minimal after that, only what is necessary to maintain the property. There is also no penalty for moving in a rental house, you just have to give notice and be out in time for the next family.
5) The Freedom from Obligation – Renting gives one more flexibility in terms of where they reside because there are almost no obligations. With buying a house you are contractually obligated to make all payments on time, keep up with property taxes if applicable, and pay your realtor’s fees if you sell your home within certain timeframe (usually 1-3 years). You can break a lease by paying appropriate cancellation fee or find someone else to take over your lease before it expires but either way there will be some cost associated with breaking it early. To break a purchase contract, depending on circumstance and state/province laws, the cost of breaking a contract can range from $5k to $50k or even more.
6) The Ability to Add Value – If you want to add value to your house than you will benefit more from owning your own home by adding value with renovations and backyard barbeques. With renting houses landlords tend not to like making wholesale changes that might increase their asking price for fear that tenants may not renew the lease and they will be stuck without income for however long it takes them to find someone else.
7) The Outlook for Investment Returns – Both options have potential returns but buying can yield higher returns based on market activity as well as personal income.
When you rent a house, your monthly
payments tend to go towards paying off the owner’s mortgage which is an
investment away from you. With owning a house equity is created through regular
payments that go directly into owner’s pocket once the home is paid off.
While both have potential for
market activity, buying comes with additional volatility because prices can be
affected by changes in interest rates and local unemployment levels whereas
rent prices are very stable across time.
8) The Experience of Home Ownership – In most cases buying a house offers higher returns than renting one but it also takes more responsibility and commitment on your part to stay up-to-date with monthly payments, taxes, and maintenance.
9) The Experience of Being a Landlord – If you are considering buying a house to live in but want to create an income stream than you can consider renting it out to tenants when you are not using the house yourself. Renting out houses requires having your place available whenever someone wants to rent it so it may not be ideal if you work long hours or don’t want to feel obligated towards helping your tenants all the time. This isn’t necessarily a negative thing but something one should keep in mind before deciding on whether they should buy a house for their own use or make extra money by renting one or more of them out.
Is renting a waste of money? Should I keep paying rent or buy a house?
Renting is not wasting money, but it
may be considered a waste if you are currently trying to save up for a down
payment on a home. Paying rent day to day does not provide the same benefits
that owning your own home provides. Renting is an option that can work well for
some people, but buying or continuing to rent will depend on individual
interest and lifestyle preferences.
Living in Your Own Home Provides Benefits
Homeownership has many positive effects on people’s lives, largely because of the sense of pride and security associated with owning something tangible. It also gives homeowners more control over their living conditions as they are able to make decisions regarding individual repairs without consultation or requiring permission from landlords or property managers.
Homeowners feel a great sense of
freedom and responsibility because they have the ability to make decisions
without consulting or seeking permission from a third party, such as a landlord.
A homeowner has the ability to make repairs to the home on their own terms
while renters must consult with property owners before making any renovations
or repair requests. Furthermore, many homeowners feel that having their own
homes allows them to be more in control of their lives due to not having to
follow rules established by landlords or other residents in communal living
spaces. There are also feelings of appreciation for an individual dwelling when
it is owned by someone rather than rented on a monthly basis.
What is a benefit to renting a home instead of buying one?
Renting Pros and Cons
When renting, one does not experience
all the benefits that owning can provide; however, renting does have a variety
of benefits in comparison to owning a home. Renters do not experience the
responsibilities that homeowners face when making renovations, maintaining
their properties, and paying for any upkeep expenses for their homes.
When viewing the financial aspect of
being a renter or a homeowner, renting is often associated with lower costs
than buying a house since renters do not pay interest rates on mortgages and
they do not have to consider monthly maintenance fees paid by homeowners. In
addition, some people prefer having more disposable income from renting rather
than being tied down to one location due to being burdened with property taxes
or high mortgage payments. There are also fewer constraints in living
locations: renters can choose where they want to live worrying about purchasing
or selling real estate, rather than having to worry about living in an area
influenced by local real estate values.
Renting Versus Buying Decisions
As stated previously, both renting
and buying can provide benefits. Renting gives you the freedom of not being
responsible for the maintenance costs of a house, but it may lead to paying
higher monthly rents as time goes on if your rent is increasing every year with
inflation. On the other hand, you will also be able to move around freely
without needing to sell or purchase another home whenever you want to relocate
across town or change states because renters are often at the mercy of
landlords when deciding whether they need to renew their leases.
If you do decide to buy a property,
make sure you understand how much responsibility this entails. As a homeowner,
you will be responsible for the repairs and renovations in comparison to when
you rent where all of these types of responsibilities are paid by your
If you do not want to own a home at
this time but would like to in the future, it is advisable that you continue
renting so that you can save money towards putting down a down payment on your
first property instead of purchasing one now. This way, if circumstances change
or if buying doesn’t end up being an option with your desired location, then
you will have time to consider other options for housing without losing any
Before making the decision about
whether renting or buying represents more value for your personal situation,
carefully consider each option and make sure it is the best choice for your
In the end, it is a matter of
personal preference as to whether you prefer renting or buying a home. Most
people choose what works best with their lifestyles and income at the moment
they are in life. However, if your situation allows you to have flexibility
with your housing needs, consider choosing to rent since there are many
benefits that come from this choice. This will allow you more freedom and time
so that when it comes time for homeownership, you can determine a plan based on
a comparison between renting and buying costs given your specific situation and
real estate market trends.
Can buying a house be cheaper than renting?
It is a common misconception that buying a house is cheaper than renting. But in most cases, you’ll pay more each month to buy a home rather than rent one. This doesn’t mean you shouldn’t buy a house if it’s affordable and the right choice for your family. It does mean you should know what factors to consider when comparing the cost of owning versus renting.
In this article, we will discuss the advantages and
disadvantages of owning vs renting a home or property, as well as which option
might be more economical depending on an individual’s situation from state to
state across America. We will also talk about the different costs associated
with buying and renting a home, along with ways you can save money while living
in either situation.
Buying a house might be cheaper than renting, but that’s
not always the case—especially if you’re just starting out.
For many people, one of the best reasons to buy a house
is because it forces them to save for their future. If you never consider your
savings account, your ability to build wealth through investing or your
retirement contributions when thinking about housing expenses you could easily
spend more on rent than on an equivalent mortgage payment…but don’t realize
it until later down the road. Now that’s not to say everyone should purchase a
home—purchasing property depends solely on your situation, budget and
preference. But the ability to build equity in a property over time is one of
the biggest advantages of owning a home.
The benefits associated with buying a house are often
accompanied by increased costs—not just in terms of finance, but also for
maintenance, insurance and other expenses required when homeownership is
considered. However, there are ways to keep these extra expenses as low as
If you’re moving into more than one state or crossing
borders on your commute consider that states and cities have different tax laws
based on whether residents own or rent their homes. Homeowners can write off
mortgage interest and property taxes on their federal income taxes. They don’t pay
higher Social Security payroll taxes like renters do. And in some cases,
homeowners can even get a tax break on insurance.
When you buy a home, it’s in your best interest to keep
the property well maintained—and that typically means spending money every now
and then for repairs or remodeling. Here are suggestions for keeping your
housing costs down:
“Renting is an option that appeals to many people
because no large initial investment is required,” says Lynnette
Khalfani-Cox, founder of AskTheMoneyCoach.com in New Jersey. “However,
most renters do not realize they could actually be spending more each month
than if they bought.”
Consumers also need to take into account other expenses
associated with renting besides the monthly payment including pet fees, security
deposits and first and last month’s rent. (These charges vary significantly by
state and community—and some landlords ask for them up-front.)
Last but not least, be aware of closing costs associated
with buying a house, which can include appraisal fees, inspection fees, title
search and insurance costs. In addition to the down payment you’ll need to
purchase your property, here are 7 more financial guidelines Khalfani-Cox
recommends following when making the decision to buy or rent: 1. Get preapproved
for a mortgage before you start shopping 2. Make sure you have enough savings
for a down payment and closing costs 3. Stick with a 30-year fixed rate
mortgage 4. Consider your future plans before deciding whether to buy or rent
5. Your mortgage payment should not exceed 28 percent of your monthly income 6.
Keep your housing expenses below 33% of your take-home pay 7.
Households tend to spend more on essentials such as rent
and utilities than on discretionary expenditures like cable or satellite
television, according to a 2016 report from the Bureau of Labor Statistics
But while renters can typically expect to spend less than
homeowners on necessities, some people might find they’re actually spending
more on non-essentials when renting because landlords often cover utility costs
that you would otherwise be responsible for—electricity, water and gas, for
Renting also offers flexibility. If you relocate
frequently and don’t want the expense and hassle involved with buying and
selling a home, renting might be the best alternative.
Additionally, no matter your location, renters typically
spend less on transportation because they do not cover the cost of gas, repairs
or auto insurance premiums.
However—in some cases—you may have to factor in
transportation costs if you live far away from work and need to pay for public
transportation or a ride-share service like Uber or Lyft to get to and from
work every day.
If you’ve never owned property before but are considering
buying a house, it’s important to learn how much you’ll have to shell out each
month after mortgage fees are included. To determine that amount, most lenders
use something called “total monthly obligation” (TMO), which is
composed of your PITI—principal, interest, taxes and insurance. This is what
you’ll pay each month to keep a roof over your head.
“So even if the monthly rent is more than what you
would be paying for a mortgage payment, chances are that when all of the
additional costs of homeownership are factored in—and looking at the big
picture—buying may end up being cheaper,” says Khalfani-Cox. “It’s
also important to consider how much time you plan on living in one place before
buying a home fits into your timeline.”