Should you buy a home or keep renting? It’s a big decision. It’s also not a decision to be made lightly, especially in landscapes as intense as the current real estate market. If you’ve been debating between renting vs. buying a home, keep reading. We’ve outlined the pros and cons of each choice and the important factors that you need to weigh before you make your decision and move forward.
What Are the Pros and Cons of Renting vs. Buying a House
Since there’s no easy answer to whether it makes more sense to own your own home or to rent, the decision becomes a personal one. Like any financial decision, there are pros and cons to both buying and renting property. We’ve outlined them below to help make your decision a little easier.
Pros & Cons of Renting
✔️ The Pros of Renting:
- Fewer upfront costs: Security deposits are typically much cheaper than down payments and closing costs.
- Fewer ongoing costs: You don’t have to worry about property taxes, insurance, or upkeep costs.
- Fewer worries about the property: Your landlord takes care of any maintenance issues.
- Added flexibility: If you want, you can move easily at the end of your lease.
❌ The Cons of Renting:
- Housing costs can change: Your landlord can decide to raise the rent.
- Housing availability can change: Your landlord can decide to sell the property at any time.
- No tax benefits: Homeowners get the benefit of additional tax deductions that aren’t available to renters.
- Less freedom to customize: Homeowners can change their property however they see fit. Renters do not have that option.
Pros & Cons of Buying
✔️ The Pros of Buying
- May build equity: You can leverage the equity in your home to build your net worth over time. You can also borrow against your home equity with a home equity loan or HELOC.
- Possible tax benefits: You may be able to take advantage of additional tax deductions to help offset the costs of owning your own home.
- More freedom to customize: You can customize or change your home however you see fit.
❌ The Cons of Buying
- Additional costs and responsibilities: You’re responsible for the maintenance and upkeep of your home, plus any costs associated with that.
- Less flexibility: If you want to move, you’ll have to go through the process of selling your home first.
- Home values could decrease: If the value of your home decreases, you could lose money on your purchase. You may also be left owing more money than your home is worth.
- You’ll be in debt. A mortgage is the largest debt most people will ever take on. If you lose a job or see your income reduced you may have serious difficulty paying it.
Is Now a Good Time to Buy a House? 5 Factors to Consider
Now that you know more about the pros and cons of renting vs. buying home, it’s time to think about whether or not now is a good time to buy a house.
In this case, it’s a good idea to look at both broader economic trends as well as your personal financial situation. With that in mind, below are five key factors to consider as you’re making your decision.
1. Inventory Levels
Inventory levels describe the number of available homes on the market. Currently, inventory levels are still at historic lows nationwide, although they’re showing signs of growing numbers.
Generally, when inventory is low, the competition for available homes can be fairly fierce. In this case, all of the buyers in the market often find themselves competing for the same low number of available homes, especially in high-demand markets. Bidding wars and offering over the asking price are more common in this type of environment.
On the other hand, when inventory is high, buyers tend to have the upper hand. Since there are more available properties than interested buyers, homes tend to sit on the market longer and sellers are more willing to negotiate just to get their home under contract.
2. Home Price Changes
Home price levels are an additional indicator to consider when deciding whether it’s the right time to buy. Home prices have been trending up for several years. However, that may not necessarily always be the case and it can depend on the unique market conditions where you live.
Obviously, home price dictates how much house you can afford, but it also plays a role in how quickly you’ll be able to recoup your investment. Keep in mind that real estate tends to appreciate over time, which is what makes it such a good long-term asset.
However, if you’re only planning on staying in your home for a short period of time, it can be hard to ensure that your home will appreciate enough for you to get back the money invested upfront, especially if you originally bought at a time when prices were escalated.
If the value of your home drops soon after you buy it, you may find yourself underwater on your mortgage, owing more than the home is worth. This can limit your options. You may have to add money to the deal if you want to sell the home. This happened to many new homeowners after the 2008 real estate crash.
As of August 2022, average home prices are beginning to fall, but they are falling from record high levels and are still very high by historical standards. That’s a factor to consider.
3. Current Interest Rates
Next, it’s important to look at current interest rates. Interest is a fee that you pay for the privilege of borrowing money to finance your purchase. Interest rates can also play a role in how much house you can afford.
Put simply, higher interest rates will cause your monthly payment to rise. It means that more of your money will be going to interest charges and less to the principal loan amount, or the amount of money that you’ll spend on the home. Lower interest rates will give you more wiggle room in your house hunting budget.
4. Your Financial Situation
Once you’ve looked at the economic factors, it’s time to look at the specifics of your financial situation. Both owning and renting come at a cost and you’ll need to be prepared to cover them.
As a rule of thumb, renting is easier to budget for than owning a home because it has fewer upfront and ongoing costs. However, rent can rise each year, which makes it harder to plan for the costs long term. By the same token, owning a home tends to be a bigger investment, but it gives you the ability to leverage your equity in a way that you can’t with a rental.
Renting vs. Buying Costs
Here’s a closer look at the costs of each:
💰 Costs of Renting:
- Security deposit: An upfront fee collected by the landlord that may be returned to you at the end of your tenancy or may be kept and used to pay for any necessary repairs.
- Monthly rent payment: The monthly fee you pay to live in the rental property.
- Additional fees: Some landlords charge additional fees for things like pets or the use of amenities.
💰 Costs of Buying:
- Down payment: This is the upfront payment you make when you close on the property. These days, it’s typically worth 3%-5% of the home’s purchase price.
- Closing costs. These costs range from 3% to 6% of your mortgage.
- Monthly mortgage payment: Your monthly mortgage payment is paid to your loan servicer and typically includes a principal loan payment, interest, taxes, and insurance costs.
- HOA fees (Optional): A fee paid for amenities and services if you live in a property where there is a homeowner’s association or condominium association.
- Maintenance costs: Any money paid for insurance, maintenance, repairs, and upkeep on the property.
5. Your Personal Timeline
Lastly, it’s also a good idea to consider your own personal timeline before making a move. Since buying a home tends to cost more upfront and some properties can take a while to appreciate substantially, buying tends to be a better idea if you’re planning on staying put for the long term.
If you want the flexibility of being able to pick up and move with little notice or you’re unsure of what your life will look like in the next few years, renting may be a better option for the time being. That doesn’t mean you’ll never buy a home, it just means it may not be the right time yet.
3 Questions to Ask When Deciding Whether to Buy vs. Rent
As you’ve probably gathered by now the decision between renting vs. buying a home is an extremely personal one. To that end, we’ve laid out some questions to ask yourself as you weigh the possibilities.
1. Are You Ready to Put Down Roots?
We’ve already talked about how buying a home could make more sense if you’re planning on staying in the same place for a while. However, generally speaking, it’s a smart idea to think in at least five-year increments.
If you’re happy with where you’re living and you could see yourself putting down roots for at least the next five years, it could make sense to think about buying. If you think you’ll be ready to move before then or that your housing needs will change significantly during the timeframe, you may be better off renting.
2. Can You Handle the Costs of Homeownership?
Obviously, homeownership comes at a cost and it’s smart to make sure that you’ve reached a certain level of financial security before you buy.
If you’re making enough money to comfortably make your housing payment while also regularly putting money aside into savings, that’s a good sign that you’re ready to buy. However, if you’re struggling to save or to keep up with your current housing payment, you may want to consider renting for the time being.
3. Can You Afford to Buy What You Want?
Finally, there’s no denying that this housing market is tough. It often requires buyers to make certain compromises, which makes it especially important to evaluate if you can afford to buy what you want. After all, buying a home is a big investment, so it’s important to be happy with your decision.
If you’re thinking about buying, talk to a lender to see how much you can afford to spend on a home. Then, talk to a real estate agent to get a sense of what properties are available in your price range. If you’re happy with what you see, it may be a sign to move forward with putting in an offer. If very few properties catch your eye, it may be better to wait for a bit.
The Bottom Line on Renting vs. Buying a Home
The decision between renting vs. buying a home is a big one. You’ll need to take time to review and carefully consider your options. Use the information above to help guide your decision-making process. Armed with this knowledge, you should feel prepared to make an informed decision about whether buying or renting a home is the right choice for you.