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The rent vs buy decision has no simple answer. It depends on the specifics of your lifestyle and personal finances.
In this article, we’ll explore the competing reasons for buying and renting. This will help guide you to the best financial decisions for your personal circumstances.
Click here for today's mortgage rates.Reasons To Buy
For most people weighing rent vs buy, the primary incentives for homeownership are financial.
Acquire Equity
To start with, you’re paying down your own mortgage rather than your landlord’s. One day, your landlord’s going to own your house or apartment outright, partly thanks to you. If you own the home, then you’re building equity.
Benefit From Appreciation
As a renter, you’re on the wrong side of house price inflation. When you’re renting, you see rising real estate values as an ever more insurmountable barrier to your eventually owning a home. When you’re a homeowner, you love seeing the value of your home appreciate each year since you’ll benefit from the capital gains.
But homeownership remains popular. And those financial factors aren’t the only reasons why people like it so much.
Monthly Savings & Affordability
Depending on the housing market where you live, the mortgage interest rate that you qualify for and the down payment you can afford, it’s very possible that your monthly mortgage payment could be less than what you’re paying in monthly rent. It’s worth crunching the rent vs buy numbers to see whether the savings offset the costs of buying.
Joy of Homeownership
For many, the biggest joy is the ownership itself. You get to come back, lock the door and feel that your home is your castle. It’s yours, in a way a rental place never can be.
And that can translate into additional freedoms. So you can make changes, additions or improvements to your home without a landlord breathing down your neck.
Then there’s that warm feeling you get as you watch home prices in your area rise, year after year. Occasionally, in some hotspots, homeowners can make more in a year from the appreciating value of their properties than they earn in their day jobs.
Yes, your gains are all on paper until you sell. And they’re not assured. But the vast majority of the time you can watch your net worth growing visibly.
Borrow against your home’s value
Better yet, as your equity (when your home value is larger than your mortgage) grows over the years, you’re able to tap into it. So when some big life event happens, you can do a cash-out refinance or take on a second mortgage, such as a home equity loan or a home equity line of credit (HELOC). Many also use these for home improvements or debt consolidation.
Of course, some renters can cope with a kid going to college or getting married, or some big, unexpected expense, or a burning desire for the vacation of a lifetime. But they need big savings or typically have to pay a considerably higher interest rate for their borrowing.
Control Your Cash Outflow
If you opt for a fixed-rate mortgage (FRM), you can budget for your biggest housing outgoing for years and decades ahead. The principal and interest on your first monthly payment are the same as on your last, up to 30 years hence.
But rents aren’t like that. As this third graph, of US Census Bureau data from 1997 to 2020, shows:
Homeownership delivers a level of stability that renting simply can’t. With an FRM, you’re freezing your biggest housing cost while rentals relentlessly rise.
Reasons To Rent
Some of the reasons to rent are the flipsides of reasons to buy. For example:
1. Home prices sometimes (rarely over the longer term) fall. This can cause real pain if you have to sell during such a period.
2. National trends in home prices and rents aren’t always reflected locally. In some real estate markets, where values have been trending lower for years, you may be better off renting, regardless of other factors.
3. Some homeowners associations (HOAs) are as intrusive as landlords. Though normally only on the exterior aspects of your home, and things like noise and other nuisances.
But other reasons to rent apply to people in specific situations.
You should rent if:
1. You plan to move on within a short time. Homebuying costs (including those for mortgages) tend to be frontloaded. Meaning you spend a lot upfront then see the benefits years later. So you stand to lose if you move after two or three years before you can realize the savings.
2. Your finances are very tight or uncertain. Often, you may pay less in mortgage payments than in rent. But there are other homeownership costs (including property taxes, homeowners insurance, repairs, maintenance costs) that you need to be able to cover. Within a lease term, the costs of renting are predictable.
3. You aren’t ready to settle down. Some people need the flexibility renting brings. They love the adventure of moving often. If you’re still only ready for a short-term commitment then renting is likely the better option.
Are Millennials buying homes?
Some commentators have dubbed millennials, “Generation Rent.” They suggest those born between 1981 and 1996 either don’t want to buy a home or can’t.
And there’s a grain of truth in that. Student loan debt can set up a real obstacle to homeownership.
And millennials tend to get around to some of the life-changing events that traditionally trigger first-time home purchases at older ages than previous generations. Marriage and having kids are perhaps the most obvious examples.
Meanwhile, millennials tend to be more racially and ethnically diverse than baby boomers, who were born between 1946 and 1964. So some of the American Dream may be less culturally embedded than in the past. And many have different wants, preferring a downtown, urban lifestyle to their parents’ and grandparents’ suburban choices.
Here’s why Millennials are less likely to be homeowners
Some of that was borne out in a study by the Urban Institute in 2018. It found:
“Millennials are less likely to be homeowners than baby boomers and Gen Xers. The homeownership rate among millennials ages 25 to 34 is 8 percentage points lower than baby boomers and 8.4 percentage points lower than Gen Xers [the generation between boomers and millennials] and in the same age group.”
But for white, married households with children and substantial incomes, the gap uncovered in that study is much smaller: just 2 to 3 percentage points lower than for similar households in the previous two generations.
Still, there does seem to be an issue. A 2020 Harvard study found more people with high incomes choosing to rent rather than buy. In 2004, 18% of renters earned $75,000 a year or more. By 2018, that number had reached 23%. And the number of married couples with children who were homeowners dropped by 2.7 million over that period.
The upfront costs of a mortgage don’t have to be a barrier
In the rent vs buy decision, many renters cite the initial cost as a reason for not buying their own homes. A down payment isn’t cheap, especially when you factor in closing costs. But it’s common for those renters to grossly overestimate how much they’ll need for the purchase price.
Zero- and low-down-payment mortgages
Some loans require no down payment at all.
VA loans (mostly for veterans and service members) and USDA loans (for those with low to moderate incomes buying in eligible rural areas) have no minimum down payment.
And there are various options for loans with low down payments. If your credit score’s looking good, you could be in line for a conventional loan (one that meets Fannie Mae or Freddie Mac rules) with just 3% down. If that score’s a bit shabby, an FHA loan could let you buy with 3.5% down, as long as your score is at least 580. With both these options, you’ll have to pay mortgage insurance (private mortgage insurance, or PMI, on a conventional loan and FHA mortgage insurance premiums on an FHA loan). But it could be worth the opportunity cost if it gets you into a home.
Down payment assistance programs
There are down payment assistance programs (DPAs) across the country. They exist to help homebuyers bridge the gap between the savings they have and the money they need to purchase a property.
Available kinds of assistance are variable depending on where you live. You may get a low-interest loan. Or an interest-free loan that’s forgiven after you’ve lived in the home for a certain number of years. If you’re really lucky, you might receive an outright grant that never has to be repaid.
And some DPAs help out with closing costs. But not all.
Is it better to rent or buy?
There is no one-size fits all answer to the rent vs buy question. The decision to buy a home (or not) depends on your lifestyle and financial circumstances.
Click here for today's mortgage rates.
