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There are strong arguments on both sides when it comes to whether it's better to rent a home or to buy one. Buying a home, putting roots down and building equity might be one person's dream but another's burden. Both are valid positions, and which one you may agree with depends on a variety of factors.
If you're thinking about whether to buy or rent a home, it's important to consider how long you're planning to live in it, whether your credit is ready for a mortgage, what your goals are and more.
Read on to compare the benefits and drawbacks of each option.
When Does It Make Sense to Rent a Home?
While homeownership is a dream for many, it may sometimes make more sense to rent. You may think renting is not a good choice because you'd be better off investing your money in a home purchase, but depending on your plans and where you are in life, renting might work better for you.
Benefits of Renting a Home
Renting a home might not help you build wealth and doesn't sound as exciting as owning a home; however, it comes with benefits homeownership doesn't offer.
- Flexibility: The main benefit of renting is the freedom it gives you. Whether you've got a great job opportunity in another state or simply want to try living in a different area, your home isn't going to tie you down if you're renting. Most of the time, breaking a lease is easier than selling a home and getting out of a mortgage.
- Minimal maintenance expenses: So your kitchen sink is leaking, your A/C isn't working and there's something that looks like mold in your bathroom. As a renter, you typically don't need to worry about repair costs—your landlord is generally required to take care of them for you. If you're a homeowner, all repair costs are likely to come out of your pocket unless you experience a major issue and can use your homeowners insurance.
- Opportunity to save or pay off debt: Short-term costs of renting are often lower, which frees up money for you to invest in your savings or pay off debt. If you'd like to shore up your emergency fund, pay down your student loans or get rid of credit card debt, renting may be a smarter decision, at least in the short term. Plus, if you plan on buying a house at some point, it can be a good time to start saving for a down payment as well.
Downsides of Renting a Home
While renting a home can be a wise choice for some, it does have its drawbacks—let's take a closer look.
- Lack of financial incentives: One of the main arguments against renting is that it doesn't build equity and isn't considered an investment. While it's not guaranteed that a home you buy will gain value, you almost certainly will not get back any money you pay in rent. Additionally, you won't be able to take advantage of tax deductions associated with home ownership.
- Rent increases: Your rent may increase every year, and such increases can be significant. It can make budgeting more difficult, especially if your goal is to save money. Rent increases aren't something you can control, and can quickly turn a great living situation into something financially unsustainable.
- Less freedom to update your space: It's nice to have a landlord taking care of repairs and maintenance for you, but it also means less freedom to renovate your home. Whether you want new floors in your bedroom or different tile in the kitchen, such projects might have to wait until you're a homeowner. It may be possible to do light redecorating, such as repainting walls, as long as you clear it with your landlord first.
- Unlikely to improve credit: Many landlords don't report rent to credit bureaus, meaning your positive rent payment history isn't likely to improve your credit. On the other hand, breaking your lease can hurt your credit. For instance, if there's any unpaid debt and your landlord can't reach you, they may sell your account to a collection agency. Collection accounts on your credit report can have a detrimental effect on your scores.
What to Consider Before Getting a Mortgage
Buying a house is a big financial decision. When you're secure in your job and seeking stability, getting a mortgage can be a logical next step.
How do you know you're fully prepared? You might want to start by assessing your financial situation. Check to see if your credit score and other factors, such as your debt-to-income ratio, will allow you to get the interest rate you're hoping for. It's also important to make sure a mortgage payment will leave you enough wiggle room that you can still afford to plan for your future, build your emergency fund, pay your bills and have fun.
It's also essential to check your credit report before shopping for a house. When reviewing your application, mortgage lenders will closely scrutinize your credit. If you know there are blemishes in your credit history, it's best to work on them before buying a home.
Homeownership can be truly rewarding if you know where your budget and credit stand and you've considered all advantages and drawbacks.
Benefits of Buying a Home
Owning a home doesn't only bring feelings of security and accomplishment. It can also be an excellent investment.
- Building wealth: When you have a mortgage, every payment builds your equity and brings you closer to full ownership. If your home increases in value, you can sell it for more than you've bought it for. Depending on the market and how well you've maintained or improved your home, it can mean significant financial gains.
- Tax breaks: Building equity is not the only financial benefit of a mortgage. You can also take advantage of property tax deductions and claim mortgage interest deductions on your taxes if you qualify. Since initially most of your monthly payment goes towards interest, a mortgage interest deduction could considerably cut your tax bill.
- Freedom to customize your home: Your home is your own, and you're free to renovate it any way you like as long as it abides by local building codes. Those improvements can also bump up the appraisal value of your home, which can really pay off if you decide to sell. Also, there's no landlord looking over your shoulder, deciding whether to withhold a portion of your deposit for the holes your TV mount has left in the drywall.
- Potential positive effect on credit: Unlike rent, mortgage payments are typically added to your credit report. Having a mortgage can help your credit score if you make payments as agreed. A typical mortgage has a term of 15 to 30 years, which means it will contribute a lot to your payment history.
Having a mortgage on your credit report can also have an impact on your credit mix. Lenders like to see various types of credit on your report, and a mortgage adds an installment loan to the mix.
Downsides of Buying a Home
Buying a home might be a good investment—or it might not. It's important to consider the disadvantages and costs of homeownership that sometimes get overlooked.
- Costs beyond the mortgage: Expenses beyond a mortgage can add up quickly. Closing costs, property taxes, homeowners insurance, private mortgage insurance (PMI), homeowner association fees, trash pickup, tree trimming and pool cleaning are just some of the costs that can significantly up your financial obligation.
Repairs and maintenance can also get expensive fast, especially if there's a major natural disaster. Without a landlord to take care of them, you'll be the one doing the work (or paying someone to do it for you).
- Potential decline in value: Several factors can harm your investment. For example, your neighborhood could become less desirable, or there could be foreclosures dragging down home values. Years down the road, you might find that your home appraises for as much as you originally paid, meaning you've actually lost money due to inflation's effect. If you plan to live in your home forever, that may not matter. But if you hope to profit on your investment and sell someday, you could be out of luck.
- Difficulty relocating: If one day you realize that you need to move and sell your home, it might not be easy. A house is a non-liquid asset, which means selling it can be hard and might take a long time. On top of that, you may find yourself responsible for paying closing costs, transfer tax, real estate agent commissions and other fees. Relocation can become expensive when you're a homeowner.
Which Is Right for Me?
The question is not whether it's better to rent or buy a home—it's what's better for you. Just because renting is cheaper doesn't mean you shouldn't look into buying a home. Just because you can afford a mortgage doesn't mean you should buy a house. What the right option is for you depends on your financial standing, goals and lifestyle.