Renting vs. buying a house: Which is right for you?

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It’s an interesting time to be debating whether to buy or rent. According to the U.S. Census Bureau, the national homeownership rate in the fourth quarter of 2023 was 65.7 percent — meaning two-thirds of Americans are homeowners. At times during the past couple years, it seemed as if the entire other third of the population was racing to buy a home themselves, spurred on by record-low mortgage rates.

However, rates are now significantly higher, and housing prices are quite high as well. Many people who can’t afford the inflated rates and prices are choosing to wait out the market instead. But rents are not necessarily so cheap either, especially in popular markets. What should you do? Here are the advantages and disadvantages of renting versus buying a house to consider before making a decision.

Renting vs. buying a house: Pros and cons

Buying

Pros

• Builds equity
• Builds credit
• No landlord to answer to
• More stability
• Possible tax benefits
• Can decorate, improve or upgrade home to your taste

Cons

• Requires substantial money upfront
• Could lose money if home values decline
• Extra expenses beyond mortgage payments
• Rising home prices and low inventory in many markets
• Responsible for the cost of repairs and maintenance

Renting

Pros

• Fewer upfront costs and paperwork
• Freedom to be more mobile
• Not responsible for maintenance or repairs
• No need to worry about falling home values
• Builds credit (if your landlord reports rent payments to the credit bureaus)
• No property tax bills

Cons

• Landlord could raise rent
• Might have to relocate on short notice if the landlord decides to sell the property
• Builds equity for the landlord, not you
• Limited vacancies in competitive rental markets
• No tax benefits
• Less freedom in design choices (paint colors, appliances)

Is renting really cheaper than owning?

The costs associated with renting a home versus owning one depend heavily on where you live and the local housing market. Bankrate’s rent vs. buy calculator can help you break down many of these expenses.

Renting doesn’t require a down payment or a mortgage, and that freedom is appealing to many people. Most rental properties do require a security deposit, though: You’ll usually put down the first and final months’ rent payments when you sign a lease.

When evaluating a lease contract, ask whether your monthly rent includes utilities such as water, electric, gas or internet. Also, inquire about how the security deposit will be held and if it will accrue interest.

For homebuyers, the down payment is a significant cost — so much so that it’s often the biggest hurdle to homeownership. Another big one is the monthly mortgage payment. This includes principal and interest for the loan and could fluctuate over time if you have a variable interest rate. Property taxes and homeowners insurance premiums are also factored in, so your mortgage payment could go up or down as those change.

If your down payment is less than 20 percent of the home’s price, your lender will most likely require you to purchase private mortgage insurance (PMI), which increases your monthly payment. Your interest rate could also be higher with a lower down payment. And if you’re purchasing a property in a homeowners association, or HOA, you’ll need to factor in monthly HOA dues. Also, homeowners must cover the cost of regular upkeep and repairs on the property.

For starter homes, renting is much cheaper

According to Realtor.com’s February 2024 Rental Report, renting a starter home specifically (defined here as 2 bedrooms or fewer) is now less expensive than buying one in all 50 metro markets it measures — a jump from 45 of the 50 markets in February 2023. Its data shows that the cost of buying a starter home was just over 60 percent higher than renting one, which equates to a monthly cost of $1,027. In fact, in the top 10 markets that favored renting over buying, the average monthly mortgage payments were nearly double the price of rents: 95.6 percent higher.

Other differences between owning and renting

Renting versus buying a home can be a lifestyle choice as much as a financial one. Renting means you’re not tied down with any long-term responsibilities. Homeownership, on the other hand, can provide a feeling of stability and community. Here are other key differences between the two options.

Building equity

While buying a home to live in shouldn’t be viewed strictly as an investment, homebuyers can capitalize on the equity that accumulates over time. If your home value goes up, you’ll earn more when you sell. Plus, if you opt for a fixed-rate mortgage, you won’t have to worry about fluctuating monthly payments as you could with rising rents.

“The benefits of homeownership accrue over the long-term through the accumulation of home equity,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “Building equity comes from paying down the mortgage balance as well as future price appreciation. But importantly, the equity accumulation isn’t pure profit, but rather works to offset some of the many costs of ownership such as taxes, insurance, debt service, maintenance and repairs.”

That said, a home purchase is a big commitment, and you likely won’t accumulate a large amount of equity right away. In fact, with closing costs, it generally takes several years to recoup your money and see any equity gains.

Tax implications

Another factor for prospective buyers to consider is potential tax benefits. If you itemize deductions, you could lower your federal tax liability by taking the mortgage interest deduction.

According to the IRS, “you can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million [$500,000 if married filing separately]) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.”

Deductions shouldn’t be the sole deciding factor, though, because your rent could end up being the same or less than the after-tax cost of homeownership. Property taxes depend on where you live and the assessed value of the home you buy, but they can be steep.

Maintenance costs

Homes need repairs and maintenance over time, and when you’re renting, those costs are generally the landlord’s responsibility. For instance, in an apartment, if the HVAC system or refrigerator breaks, the landlord has to fix it.

As a homeowner, though, you’ll be on the hook for those costs — and they can add up fast. Even if you’re handy and plan to do your own upkeep, you might not be able to commit to this level of maintenance over time. Factor in these costs when evaluating whether you can afford to purchase a home, and be sure to get a home inspection to be aware of potential red flags.

Insurance requirements

Neither state nor federal laws require homeowners insurance, but mortgage lenders typically require it when you buy a house. Depending on where you live, you might also be required to have additional coverage for floods or earthquakes. Home insurance premiums can be quite hefty, especially in areas prone to severe weather (like Florida, which is experiencing a home insurance crisis).

For tenants, it’s smart to have renters insurance, which protects personal possessions in situations like theft or fire and offers some liability protection. Renters insurance is much more budget-friendly than homeowners insurance.

Should I rent or buy? 7 key questions

The answer to the rent vs. buy debate isn’t cut and dried. It’s important to evaluate your current life situation and how much it’s likely to change in the immediate future — if you are moving to an unfamiliar city, have an unstable job situation or don’t know what neighborhood will feel like home, renting can be a great option. However, if you’re looking to settle down and plant some roots, buying is likely a better option. Here are seven important questions to ask yourself when considering renting vs. buying:

1. How much can I afford in monthly housing costs?
2. Am I prepared for a long-term investment?
3. How long do I plan to stay in this home?
4. Do I want stability or flexibility?
5. Can I afford home repairs/maintenance costs?
6. What are my financial, career and family goals? (For example, do you plan to relocate for work? Go back to school? Expand your family?)
7. Is homeownership in my preferred neighborhood achievable, or would I need to expand my search zone?

Bottom line

Deciding between renting and buying a home isn’t just about cost — the decision also involves long-term financial strategies and personal circumstances. If you’re on the fence about which is right for you, it may be helpful to speak with a local real estate agent who knows your market well. An experienced agent can help you weigh your options and make a more informed decision.