Should I Buy or Rent a House?
In Your Home Search, by Anthony Bayardelle
Deciding whether you should rent or buy a house that is one of the largest decisions you have to make. even the experts engage in a lot of of debate on which is more financially sound, and there is no clear answer that is right for everyone across the board.
While far more people choose to buy a home than rent, and have for a majority of modern history, since 2006 the percentage of people who choose to rent is increasing faster than those who choose to buy. According to Pew Research Center, as of 2016, over 75 million people called themselves homeowners, whereas only 43.3 million people chose to rent their homes.
These figures notwithstanding, many people are still torn as to whether they should rent or buy. Most know that buying is a better long-term that, but there are some factors that make renting a pretty tempting option in the short-term.
In this article, we go over the arguments for renting and buying, respectively and then give you some individual factors you need to consider when making your own personal choice on the matter.
The Argument for Renting
Conventional wisdom says that home buyers should be prepared to stay in one home for 3-5 years in order to get back the costs of purchasing the home (which typically amount to 2-5% of purchase price). If you're not sure where you're going to end up, if you may need to relocate for work, or if you are approaching a planned relocation, now might not be the best time to buy a house.
Maintenance is Easier
No one can debate the fact that calling a landlord is easier and cheaper than having to either fix something yourself or call your own repairman. When renting, if a pipe breaks you can call your landlord and they have the duty to fix it. In a home that you own, you are left standing ankle-deep in a pile of water holding a wrench and Googling late-night plumbers on your cell phone.
This one factor doesn't negate all the benefits of homeownership, but it does top the list for the conveniences of renting.
Fewer Extraneous Expenses
Unfortunately, buying a house does entail a number of extra costs that are not present when you rent. Things like homeowner’s insurance, annual property taxes, closing costs, and other random pop-up expenses are all too frequent when you own a home. Renting is far simpler when it comes to the sheer number of bills you have to pay.
The Argument for Buying
The most significant benefit of buying a house is that the money you pay each month for your mortgage is still technically yours. Yes, a portion of your payment goes towards interest to your mortgage, but when you are renting, all of your rent goes into your landlord’s pocket never to be seen again.
When you buy a house, you have to make payments for the full term of your 15- or 30-year mortgage, but after that you own the home outright. No more payments are necessary, and when you decide to sell you get the full sale value of the house to devote to whatever home you wish to buy next.
This is the primary reason why you should buy if you are financially capable. Once you start building equity, every home purchase from that point on is going to be that much easier.
Rents Can Increase at Any Time
When you choose to rent, you are always at the mercy of your landlord. They could decide to sell your building, forcing you to move out all together. They could decide to raise your rent at almost any time.
This is another major upside of buying a house because once you lock in a mortgage rate it stays consistent for the duration of your mortgage.
You can rent a standalone house, but most often when you rent it is going to be in greater proximity to other people. This means you have to interact with your neighbors, listen to people fight through thin walls, and deal with all the drama that comes with having co-tenants. It is a simple fact that owning affords you a greater degree of privacy and control over your housing situation.
Owning Means You Can Make It Your Own
They're all kinds of rules when you rent. landlords can often make rules about what type of pet you can have, whether or not you can change certain things inside your house (anything from changing out moldy bathroom tile to repainting the walls), and you almost certainly cannot make any structural changes to the home you're living in.
On the other hand, when you own a house it is completely yours. You can change, modify, and renovate it as you wish, and these changes might even add to the eventual value of your home when you decide to sell it.
Make Money from Your House
There are many ways you can actually make money from owning a home.
As we mentioned above, if you make major improvements or Renovations it might add value to your home in a pretty significant way. You can also make money simply from owning the home over time because homes tend to appreciate in value the longer you stay in them. According to Zillow, the average annual appreciation rate for homes is between 3 and 5%, which means that if you stay in your home for any significant amount of time you stand to make a profit when you sell even if you don't make any structural improvements to the property itself.
Yes, there are in fact tax advantages to owning your own home. Money buyers are able to itemize their taxes and thereby write-offs some or all of their mortgage interest payments, which is a huge advantage come tax season.
You can learn more about the specifics of current tax laws and the mortgage interest deduction with a quick Google search, but it might also be beneficial to talk to your realtor and or accountant about this. If you qualify, it could be a significant financial benefit.
Short Answer: Buy If You Can Afford It
There are many advantages to renting which makes it cheaper and more convenient in the short-term. However, the fact that Your monthly mortgage payments are going into your own Equity rather than your landlord’s pocket makes buying a significantly better option in the long term.
That said, there are several important things that might indicate you should not make a home purchase, or at least not right now.
Signs You Shouldn’t Buy Right Now
You Plan to Travel or Relocate Frequently
If you work in a job that has you traveling frequently or bouncing from city to city buying might not be the smartest option. As we mentioned above, homeowners should typically plan to stay in their home for at least 3 to 5 years, so if you want to travel abroad, try out different cities, or remain flexible to go get where your career takes you, renting might be a better option for now.
You Might Go Back to School or Quit Your Job
If you anticipate any major financial changes in the near future, whether good or bad, it might not be the best time to lock yourself into a 15- to 30-year commitment. If you are expecting a sudden increase in tuition bills, potential loss of income, or any other financial situation which would put your ability to pay a mortgage at risk, it might not be the best idea to buy a home at the moment. You want to make sure you can comfortably project where you will be financially for the next 15 to 30 years of your life and commit to making the same monthly payments, regardless of your circumstances.
You’re Planning to Expand Your Family
If you or your significant other has been hearing your biological clock take a little louder than normal, you might want to hold off on buying a house for now.
Having more kids is not only a financial commitment, but it can also bring about new concerns for your house, such as which neighborhoods have the best schools, how many bedrooms you need, and many other similar factors. This isn't to say that you shouldn't buy a home if you are planning to have kids or more kids, but it does add more complications and factors to consider.
You Can’t Afford to Live In the Area You Like
Even if you can technically afford the expenses of buying a house, you don't want to put yourself in a situation where your entire paycheck is going towards your mortgage each month. This leaves very little room for other expenses or possible emergencies that might crop up, not to mention saving for the future. Ideally, you want your mortgage payment to be below 25% of your monthly take-home pay.
You Have Significant Debt
This is not to say that it's impossible to buy a house until you have paid off a hundred percent of your debt, but it is significantly harder to fit a mortgage into your budget when you are also paying down other loans.
If you have significant credit card debt, student loans, or other forms of debt, it might be smarter to opt to rent an apartment until you get your finances a little more in hand.
You Don’t Have Any Savings
One of the most important determining factors of how much your mortgage payments is going to be is the amount you have saved for a down payment on a house. If you don't have any savings whatsoever, it might be smarter to rent for a year or two while you build up a nice solid down payment and then choose to buy when you have this to lock you into a much lower mortgage payment.
Frequently Asked Questions
What is the best age to buy a house?
Unfortunately, there is no such thing as the “right” age to buy a house.
Yes, deciding to be a homeowner is a major milestone of adulthood, but it is not one you should attempt before you are ready. Instead of buying a house when you reach a certain age, it should be more about buying a house when you are financially capable of doing so in a way that benefits of your financial future.
How long should I rent before buying a house?
Just like we discussed with the previous question, there's no set number of yours for which you should read before you buy. Buying a house is more a matter of whether you are financially prepared for a commitment that magnitude then it is a milestone to reach at a certain time or a box to be checked.
You should rent until you have enough money saved for a down payment, your lifestyle is fairly stable, and you know the area you want to live in for at least the next 3 to 5 years.
What if I want to buy a house but can’t afford it?
First of all, make sure you actually can’t afford to buy a house. In many cases, people think buying a home is exorbitantly expensive, but they are actually paying equal or greater amounts of money renting. Additionally, the money they are paying as a renter is going into the pocket of their landlord, whereas a mortgage would be building their own equity and savings in their home.
Take some time to research basic mortgages and mortgage types And talk to an actual, human, lender to see a report of your specific options. (This report will be free from any qualified and reputable lender, so don't work with anyone who says they need to charge you for it.) Again, internet research is great, but there are so many different types of loans that only someone who works in the business can actually tell you which ones you qualify for.
If you really want to buy a house but still can't quite afford it financially, there are still some options available. You can always choose to buy a house with someone else, to rent out an extra room in the house you buy, or to buy a condo or townhome rather than starting out with a stand-alone house. Again, you should talk to a qualified mortgage loan officer to find your exact financial threshold and to discuss the options that might be available for your specific situation.
Factors to Consider
So, given the fact that there are no broad-line rules for whether it's better to rent or buy, it comes down to your individual circumstances to determine which option is right for you. Here are some of the most important factors you should consider when making this decision.
Check the Financial Specifics for Your Area
Not all counties are the same. Market conditions vary greatly by area, so what might be true in New York won’t be the same in Chicago. As of 2018, buying a home was cheaper than renting in 35% of US counties, whereas renters had lower short-term costs than buyers in the rest.
It’s also important to consider whether you’re moving to a big city or somewhere more rural or suburban. Chances are renting is going to be more advantageous in the big-ticket areas (think NYC or LA), whereas in the suburbs or almost anywhere in the Midwest or Northeast it will probably be more to your advantage to buy.
Are Quality Rentals Available
If you are in the middle of a large sitting, there are most likely a bunch of numbers of rentals available. However, if you live in a more suburban or rural area, quality rentals might be a lot harder to find. Whether you should rent or buy depends largely on the availability of houses in your area.
Consider the Downpayment
As we briefly mentioned before, one of the major determining factors in your monthly mortgage payment is the amount you have available for a down payment. Although traditional wisdom dictates that your down payment should be 20% of your home value, check out our ultimate guide to downpayments because this doesn't always actually have to be the case.
Check Your Buying (or Borrowing) Power
Which loans you qualify for does depend on your financial history to some extent. Knowing what credit score you need to buy a house is an essential part of knowing your purchasing power. When you're deciding whether to buy or rent, compare the houses you would want to live in with actual figures on how much house you can afford. If there's no way you could be financially comfortable in the houses you're looking at, it might be smarter to rent and save money for a while before you buy. However, if the houses you're looking at are in your appropriate price range, buying is probably a smarter long-term call.
Do the Math
In cases where renting seems cheaper, run a quick comparison of the cost of renting (and reinvesting any savings) versus the equity you build from buying your own house.
If you want a clear answer on what you should do, there are many online calculator tools that can help you gather some information. Bankrate’s Rent vs. Buy Calculator, Nerdwallet’s Rent vs Buy - What’s Right for You? Tool, or The New York Times’ Better to Rent or Buy interactive tool are all excellent ways to get some basic financial information that is specific to your financial status.
However, it's important to note that you can't get the full breakdown or a completely accurate answer from an internet calculator. Whether you should rent or buy depends largely on the houses available in your area and what type of mortgage you qualify for, which means that the only way to know for sure is to talk to an actual, human loan officer and/or realtor.
It's best to talk to someone who has a realtor’s license, in-depth knowledge of your desired area, and a loan processing license so they can look up which exact loans you would qualify for given your specific financial situation. A consultation like this will be completely free of charge and really quick for any knowledgeable real estate expert.
If you would like more information, contact me using the form below and I can easily give you a free report with a layout of your specific options.