Everyone needs a place to live, somewhere to keep their things, and a bed to sleep in at night. If you’re looking for housing, your options are generally to rent or buy a home of your own. There are many benefits to homeownership and many reasons why renting can be a good idea, so it might be difficult to figure out which is the best choice for your situation.
We’ll cover the different factors that could influence your decision about buying or renting a home:
Pros and Cons of Buying a Home
Buying a home is a major investment. There are lots of reasons why people decide to purchase a home instead of renting, but it’s also important to consider the drawbacks of homeownership.
Pros of buying and owning a home
For some, homeownership is an integral part of the American dream. Here are a variety of financial and lifestyle benefits to purchasing a home.
One of the top financial benefits of homeownership is building equity. Equity is the value of your home compared to the amount you owe on your mortgage. Your equity generally increases every time you make a mortgage payment and as the value of your home climbs.
Homeowners can take advantage of their equity by selling their property, taking out a home equity loan or line of credit, or getting a cash-out refinance, if they’re qualified. This allows homeowners to invest that money in another asset or use it on something like paying down debt.
For many Americans, home equity is one of the top sources of wealth. Renters don’t build any equity, which makes this a major perk of property ownership.
There are tax benefits that make buying and owning property less expensive. One example is the mortgage interest deduction, which allows homeowners to deduct the interest paid on a mortgage from their taxable income. They may also deduct costs for qualified mortgage insurance and payments for state and local real estate taxes. These tax benefits effectively reduce the cost of homeownership.
Homes tend to increase in value over time, so if you need to sell your home years down the road, you’ll likely be able to fetch a higher price than you originally paid. According to data from the Federal Reserve Bank of St. Louis, the average price of a home sold in the United States rose from $80,000 to $403,900 between 1980 and 2020.
Stable monthly payments
If you opt for a fixed-rate mortgage, the monthly payment for your home generally will stay the same over the life of the loan. Mortgages typically are repaid over 15 or 30 years, so your payments — and housing budget — will remain predictable in the long term.
While your monthly payment could change if your property taxes are adjusted based on an updated assessment of your home’s value, or if your insurance is modified, these are exceptions.
Freedom to renovate
Unless the home is located in a community with a homeowners association, there’s usually no outside party dictating what homeowners can and can’t do with their house. If you own your home and want to knock down a wall, redo your kitchen, or add air conditioning, you have the freedom to make those changes.
Opportunity to build credit
The No. 1 factor that determines your credit score is your payment history. One of the main differences between paying a mortgage vs. rent is that you’re repaying a loan when you have a mortgage. Making monthly mortgage payments on time adds to your payment history, and could help boost your credit score over time.
Cons of buying and owning a home
Though there are many benefits to owning a home, it’s important to understand the drawbacks as well.
Higher upfront costs
Buying a home typically involves significant upfront costs. Even if you qualify for a Federal Housing Administration loan, which has one of the lowest down payment requirements at 3.5%, that still means putting down almost $16,000. This figure is based on the average price of a home sold in the third quarter of 2021 — $453,300 — according to the Federal Reserve Bank of St. Louis.
Other upfront homebuying expenses include closing costs, which are charged by third parties involved in the property transaction. These typically run between 2% and 5% of the home’s purchase price, according to Freddie Mac, a government-sponsored enterprise.
Maintenance and repairs
As a homeowner, you can’t just expect someone else to fix the problem when something breaks. Owning a home also means being responsible for keeping it in good condition.
“A common mistake that I see many people make is underestimating the costs of home maintenance,” says Nick Stecklein, a certified financial planner and financial advisor at North Capital in Salt Lake City. “There are things like lawnmowers, tools, cleaning supplies and not to mention a large amount of your time that is required to upkeep a home.”
As a homeowner, you generally pay property taxes based on the value of your home and where you live. This can significantly increase your annual housing costs, as some places have high property tax rates.
For instance, New Jersey charged an effective property tax rate of 2.13% in 2019, according to the Tax Foundation, an independent tax policy nonprofit. This made New Jersey the state with the highest effective property tax rate in the U.S. In a simplified example, if you purchase a home worth $250,000 in New Jersey, property taxes would add more than $5,000 to your annual housing costs.
Lenders typically require that you purchase homeowners insurance as a condition of getting a mortgage. This type of insurance is often part of the monthly mortgage payment, and pays for damage to your property or losses, thus protecting your lender’s investment.
Homeowners insurance rates are also subject to change, so you may find yourself shopping around for a new insurer every so often.
Risk of property values declining
While it’s historically uncommon, property values could drop and eat into a homeowner’s equity. Over some periods, housing prices have seen a decline rather than growth. For example, between the first quarters of 2007 and 2009, the average home sale price fell from $322,100 to $257,000, according to data from the Federal Reserve Bank of St. Louis.
Selling a home can incur significant costs — often as high as 10% of the sale price, according to AARP. The major cost of this transaction could make it expensive and inconvenient for homeowners to move. Few people want to spend up to tens of thousands of dollars on closing costs to buy a home, only to move again soon after and pay even more for the costs to sell.
Ultimately, the costs of buying and selling a home could mean homeowners have less flexibility to accept a new job opportunity in another part of the country or simply move to another part of town.
Pros and Cons of Renting a Home
Most people start out renting, and some choose to rent for the long term. Let’s cover the advantages and disadvantages to renting.
Pros of renting a home
Renting offers more flexibility compared to owning a home, and can be a less expensive option overall. These are some of the reasons to consider renting instead of buying.
Freedom to move when your lease ends
Renters can move to a different home as soon as their lease ends. As a renter, you have no obligation to renew your lease and stay in the same place. This means you have more flexibility to accept opportunities that might involve relocating.
In extreme circumstances, you could also try negotiating with the property owner to end your lease early. But if you’re planning to break a lease, you should consult with a lawyer and be prepared to pay fees. A lease is a legal contract, and an experienced lawyer can advise you on the specifics of breaking a lease in your state.
Streamlined monthly expenses
Some leases can come with certain utility costs included in the rent. Additionally, renters aren’t obligated to pay other costs of homeownership, like repairs or maintenance. This helps streamline monthly housing expenses for renters.
No responsibility for maintenance and repairs
When comparing owning a house vs. renting, one major difference is that renters aren’t responsible for the cost of home maintenance and repairs. These costs are borne by the property owner. This means a renter typically doesn’t need to worry about large, unexpected expenses like a broken water heater or leaking pipes. They just keep paying the rent.
Less overall risk
Homeowners face the risk that their property could lose value or get damaged by fire, a natural disaster, or another event. Additionally, if a homeowner is unable to pay their mortgage, then they risk defaulting on the loan and losing their home to foreclosure. Renters have no ownership over their homes and haven’t built any equity, meaning they don’t face these risks.
Lower initial costs
People typically make a down payment and pay high upfront costs to buy a home — up to tens of thousands of dollars in closing costs — whereas renters often move in with just a rental application fee and security deposit. Some property owners may also charge a pet deposit or fees, along with a move-in fee that covers things like switching the locks. Still, these initial costs to rent usually fall short of a down payment and closing costs.
Cons of renting a home
Though renting has its perks, there are downsides to consider when deciding whether to rent a home.
Less control over the home
Renters don’t own the place where they live, which means they don’t have the freedom to make significant changes to their space. Any home renovations must be approved by the property owner, or else the renter might risk violating the terms of their lease.
Risk of rent increases
If you’re renting, the property owner can adjust the rent whenever your lease expires.
According to a study by Apartment List, an online rental marketplace, the median rent in the U.S. rose by 17.8% between January and November of 2021. From 2017 to 2019, when rent increases weren’t so sharp, rent still rose by an average of 2.6% between January and November of each year. While some areas — like New York City — may have laws limiting how much rent can increase, the data shows that renters’ housing costs generally increase over time.
No end date to payments
Once a homeowner reaches the end of their loan term and pays off their mortgage, they no longer need to make payments to their lender. Renters don’t have a similar end date in sight, and must keep making rent payments for as long as they live in their home.
Homeowners build equity as their home’s value increases and they pay down their mortgage. Renters don’t have ownership over their homes, so they aren’t building wealth with their rent payments.
No mortgage interest deduction
The mortgage interest deduction is a tax benefit available to homeowners. Renters don’t have a mortgage, which means they can’t take advantage of this deduction when filing taxes.
Is Renting or Buying Better in 2022?
The truth is that there’s no real answer to whether renting or buying is better in 2022. There are pros and cons to both options.
Renting makes it easier to change locations and accept new opportunities. It also comes with lower initial costs. But average rent continues to rise, and renters can’t build wealth in the form of home equity.
Owning a home could provide stability and help you grow your wealth. Plus, when market interest rates are low, it can be cheaper for qualified borrowers to take out a mortgage. However, homeownership involves significant upfront costs and could leave you with less flexibility to move.
Ultimately, whether renting or buying a home is best for you will depend on your personal situation. If you’re young or still trying to figure out your next steps, you may prefer the flexibility of renting. Someone who has a secure job and is thinking of starting a family may place a greater value on the stability of homeownership.
The Bottom Line on Renting vs. Buying a Home
There are many advantages and disadvantages to renting vs. owning. Housing is a major part of the average American’s monthly expenses, so it’s important to make the right decision for your situation. Ultimately, it might come down to whether you’re looking for flexibility or stability, and your willingness to make a large, upfront investment in a home.