The decision of whether to rent or buy a home is a question that many households grapple with sooner or later. The correct answer isn’t the same for everyone, and there are many factors you should consider before deciding whether renting or buying is the best option for you.
As with any important decision, it’s important to look at the big picture when deciding whether to rent or buy. You’ll want to weigh all the pros against the cons and then take stock of both your current situation and your future goals and dreams. This will enable you to make the smart decision for your family and develop a plan for how you ultimately get there.
Look at the Short- AND Long-Term Benefits of Renting vs. Buying a Home
One of the mistakes people typically make when deciding whether to rent or buy a home is to only look at the short-term and immediate pros and cons. It’s important to remember that the typical fixed-rate mortgage has a 30-year term, so you’ll need to evaluate things through the lens of that timeline and how renting or owning a home sets you up for the years afterward.
As we’ll see—especially from a financial perspective—renting a home can often look like the better option in the here and now (rent is typically less expensive than house payments, your landlord covers the cost of repairs, it’s easy to pick up and move, etc.), but owning a home outright could provide you with a great deal of wealth, financial flexibility, and security years down the road.
Are the Upfront Costs of Buying a Reason to Rent?
However, it must be said that the biggest barrier to buying a home is the upfront costs. While first-time home buyers have great options available for favorable mortgages and low down payments, the mortgage down payment and closing costs of the home sale will still easily add up to many thousands of dollars . . . and that doesn’t even factor in the cost of any immediate repairs or renovations that need to be made to the home once you’ve moved in.
These upfront costs can make buying a home feel out of reach, but this isn’t necessarily true. What it does mean is that you’ll need to develop a plan for how to save the money you’ll need to buy your home, which might necessitate renting for the immediate future.
In the end, the upfront costs of buying a home shouldn’t make the decision of whether to rent or buy for you. They are a reality of your current financial situation that needs to be accounted for, but you should evaluate the pros and cons of owning versus renting with the assumption that you’ve saved enough money to cover those costs, and then plan accordingly.
Home Equity vs. Investments and Savings
When deciding whether to rent or buy a home, you need to consider more than just the raw cost of a rent payment compared to a house payment. A rent payment is simply that: You’re making a payment to a landlord in exchange for living in a house that they own.
A house payment, however, is a more complicated evaluation. When you pay your mortgage every month, some of that payment goes toward paying things like interest on the home loan, homeowners insurance, and property tax. However, there’s also a portion that goes toward paying the principal (i.e., repaying a portion of the actual money you borrowed to buy the home).
When you pay down the principal on a home loan, you’re also building equity: You’re increasing the portion of the home’s value that you own outright. At the end of a 30-year fixed-rate mortgage, you’ll own the full value of the home yourself.
Home ownership is often viewed as a long-term investment because your home equity is functionally wealth that you can tap into. For example, you could use some of your equity to do a cash-out refinance on your mortgage. You could also take out a home equity loan or a home equity line of credit, where your home is the collateral used to secure the loan or line of credit. In this way, equity gives you access to money you wouldn’t have available to you if you were renting a home instead.
The portion of a mortgage payment that pays down the loan’s principal is effectively a form of forced savings that builds further wealth when your home increases in value. This means that a lower rent payment only truly saves you money if you refrain from spending the money and instead invest it so that it can build further wealth for you over a similar 30-year period.
Freedom to Move vs. Putting Down Roots
How long you plan to stay in your home should also be considered. Renters have an easier time packing up and moving, whether it be for a new job, relationship, or any other reason. All that needs to be done is end the lease and then pack up and move.
Homeowners, on the other hand, generally need to sell their home before they can move, which can be a lengthy process. Other than packing up their belongings, homeowners also need to make necessary home repairs, put the house on the market, negotiate a sale with a buyer, and then go through the inspection and closing process before they can fully put their old home behind them.
On the flip side of this, renters also only live in their home for as long as their landlord is willing to rent to them. If a landlord decides to stop leasing their home or sells it, a renter might have no choice but to move out, potentially on short notice. Owning your home, by contrast, means that you can live in it for as long as you’re able to make the mortgage payment.
Break-Even Point: How Long Will You Live in Your Home?
Related to how long you plan to live in your home, there’s also the break-even point to consider. This is the amount of time you’d need to live in your home before the long-term costs of renting become more expensive than the upfront costs of buying a home.
The exact break-even point will depend on your area’s housing market, but it’s generally somewhere around the five-year mark. This means that if you plan to live in your home for less than five years before you move again, renting might be more cost-effective than the sum of a mortgage down payment, closing costs, and five years’ worth of mortgage payments.
Home Repairs and Renovations
Owning a home means taking care of a home. If something breaks or wears out, it’s the homeowner's responsibility to fix or replace it. Renters, however, can usually expect their landlord to shoulder this responsibility. Some landlords even take care of mowing the lawn.
While homeowners have the additional cost and responsibility of home repairs, they also have the freedom to do whatever they want with their home. A homeowner can paint their walls any color they like, knock down walls to open up rooms, build fences, and make any other renovations or improvements they choose.
Renters, by contrast, can only make the changes their landlords agree to. And even then, renters are effectively making improvements to a home owned by someone else. When homeowners make repairs and renovations, they are making improvements to something they actually own—and potentially increasing its value, thereby generating more wealth and equity for themselves.
Freedom to Have Pets in the Home
Related to home repairs, many landlords are reluctant to allow their tenants to have pets for fear that the animals will cause damage to the home. Whether you want a cat or a dog, your landlord might either refuse to allow it or limit how many or what breeds you can have. The landlord might also require a substantial and non-refundable pet deposit before you bring a pet home.
Homeowners, obviously, are free to have whatever pets they choose, but they’re also responsible for any damages caused by their pets. The potential costs of replacing stained carpets, chewed-on stair balusters, and scratched hardwood floors and doors are all things that should be considered before adding a pet to your household.
Inflation and the Cost of Shelter
When making your monthly budget, there should always be a line item for your “cost of shelter.” This is your monthly mortgage or rent payment. Ideally, this amount should be no more than 30 percent of your monthly income.
For renters, the cost of their rent is only guaranteed for as long as the term of their current lease. Unfortunately, the cost of rent tends to increase over time and is expected to double over the course of the next ten to twenty years.
Homeowners are less vulnerable to inflation and can expect more stability in their cost of shelter. While the cost of homeowners insurance and property tax does generally increase over time, the majority of a mortgage payment goes toward paying off the home loan’s interest and principal, which will stay the same for the full term of the loan.
Additionally, homeowners have the option to refinance their mortgage if rates go down, which means that owning a home could actually allow you to decrease your cost of shelter over time.
Taxes, Insurance, and Fees: Owning vs. Renting
Finally, you’ll also need to consider taxes and insurance. Renters don’t need to deal with property tax or homeowners insurance directly, but it’s worth noting that a portion of their monthly rent is used by the landlord to cover these costs.
While not all landlords require it, renters are usually advised to take out a renters insurance policy, which would cover the cost of their personal property in the event of theft, fire, or something similar, as well as liability for any injuries suffered by others on the property.
Homeowners, on the other hand, pay for property tax and homeowners insurance when they make their monthly mortgage payments. Homeowners do have some control over their insurance premiums, as they have the ability to compare different insurers and policies.
Depending on the neighborhood, homeowners might also have the additional cost of homeowners association (HOA) dues and fees. Living in a neighborhood with an HOA can also curtail some of the freedoms homeowners normally enjoy when it comes to what they can do with their home’s lawn and exterior.
Renting vs. Buying a Home: Which Is Right for You?
Whether to rent or buy a home is a multi-faceted question without an easy answer. Much depends on your current finances, your short-term goals, your long-term plans, and how much you value the freedom to do what you want with your home and lifestyle.
If you decide that buying a home makes the most sense for you, Hancock Whitney can help you secure the home loan that works best for your finances and long-term goals. Contact our mortgage loan originators today to find out what your next steps should be.
