That’s a question without a simple answer; it depends on the specifics of your lifestyle and finances.
In this article, we’ll explore the competing reasons for buying and for renting. This will help guide you to the best choice for your personal circumstances.Click here for today's mortgage rates.
Reasons To Buy
For most, the primary incentives for homeownership are financial.
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. You’re going to end up with no comparable asset — unless you invest every cent you save by renting (if any) in ways that pay off handsomely.
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 main asset appreciate each year — unless it doesn’t. More on that later.
But homeownership remains popular. And those financial factors aren’t the only reasons why people like it so much.
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 considerably more 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 first monthly payment on your mortgage is the same as your last — up to 30 years hence.
But rents aren’t like that. As this third graph from the US Census Bureau 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. Indeed, over the last decade or so, you’d have done even better with an adjustable-rate mortgage (ARM).Ready to shop for a home? Start here.
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. That 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 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.
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 (property taxes, insurances, repairs, maintenance …) that you need to be able to cover.
3. You aren’t ready to settle down. Some people need the flexibility renting brings. They love the adventure of moving often. CTA
Are Millennials buying homes?
Some commentators have dubbed millennials, “Generation Rent.” They suggest those born between 1981 and 1997 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. Bank of America’s 2020 Homebuyer Insights study found 30% of potential homebuyers cited this a worrying barrier.
And millennials tend to get around to some of the lifechanging events that traditionally trigger first 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 2019. 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 millennials] and in the same age group.”
But when you allow for race, ethnicity, the presence of children and income, 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.Speak with a mortgage specialist today.
The upfront costs of a mortgage don’t have to be a barrier
A reason cited by many renters for not buying their own homes is the initial cost. 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.
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 moderate incomes buying in rural development 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 (maybe from Fannie Mae or Freddie Mac) with just 3% down. If that score’s a bit shabby, an FHA loan could let you buy with 3.5% down.
Down payment assistance programs
There are thousands of down payment assistance programs (DAPs) 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.
The bottom line
There is no one-size fits all answer to the question of whether you should rent or buy. The decision to buy a home — or not — depends on your lifestyle and financial circumstances.Click here for today's mortgage rates.