Housing is probably one of the highest monthly expenses you’ll ever have. While owning a home one day is a common goal for many of us, sometimes it difficult to tell whether renting or buying a home will actually be better for our finances now and in the long run.
Personally, I was always told that renting year after year was throwing away money and that I should consider buying a house. Then, I look at some of my homeowner friends and I wonder how they can afford to maintain, furnish, and upgrade their homes.
According to the U.S. Census Bureau, last year, the homeownership rate for millennials who were 35 and under dropped to 35% which is a 4% decline since 2010.
Now, the reason why fewer millennials are buying homes could be due to a lack of interest or for financial reasons. I figure it’s most likely a combination of both but it still leads many of us to ask, is renting really cheaper than buying?
The Advantages of Renting
Renting can be a better option if you’re looking for housing arrangements that are somewhat flexible. Typically as a renter, you only have to sign a lease for a year, 6 months, or even on a month-to-month basis which provides you with more freedom to move, travel long-term, etc. as opposed to being tied down with mortgage payments for 30 years.
The initial investment to rent a house or apartment is also quite low when compared to the rigorous process of coming up with a down payment for a house and paying for inspection fees and closing costs.
When you have lower costs upfront, you can use the rest of your money to cover living expenses, save, and invest, etc.
Another thing I love about renting is that there’s often no responsibility to take care of maintenance and repairs. If something breaks or if your home needs to be remodeled or updated, your landlord will most likely take care of it. I love that my apartment even pays for our carpet to get cleaned and our walls to be repainted every year.
Renters insurance is dirt cheap since you don’t have to pay to insure the property itself and most of your utility bills can be covered in the price of your rent if you live in an apartment.
Again, not having to pay for these expenses as a renter can help put more money in your pocket that can be used elsewhere in your budget.
The Advantages of Buying
Buying a home is an investment that you tend to put a lot of money into upfront. The costs of buying a home fluctuate depending on the market in your area and your credit, but if your credit score is good and you choose a home that’s in your budget, your monthly mortgage may end up being less than the average rent rate in your area.
The more you put down on your home, the better because you can keep your mortgage low and avoid costly expenses like mortgage insurance. If you have a fixed interest rate, you probably won’t have to worry about your mortgage payments being subject to increase each month like a renter would.
Plus, you can always refinance your mortgage later down the road to get a lower interest rate and reduce the amount of your housing payments even more. Owning a home allows you to build equity in a property as opposed to paying rent each month and having no equity.
You’ll also have the freedom to decorate, rearrange, and update your home however you please, unlike if you were a renter.
The Disadvantages of Renting
Renting definitely has some disadvantages along with quite a few hidden fees people should consider. For starters, depending on your landlord, your rent rate could increase every time you sign a new lease making your cost of living higher each year. This is what my husband and I are dealing with right now and we find the rent increase unnecessary because our apartment has not even been upgraded since we moved here.
While upfront costs may be cheaper than buying, they may not be as low as you expect because some landlords prefer a high security deposit and sometimes expect 1-3 months of rent when you move in.
Plus, if you have pets, not all landlords accept pets. For the ones that do, you may have to pay a much higher rent rate or add on an annual deposit or monthly fee if you wish to add a pet to the lease.
There are also many more picky rules and regulations for renters to abide by while homeowners can enjoy a little more freedom in regards to what they do with their property.
The Disadvantages of Buying
The biggest financial disadvantage I see homeowners mention (when compared to renting) include the ongoing costs of maintaining and repairing a home. Homeowners must keep a larger emergency fund on hand than renters because they have more responsibilities regarding the upkeep of their property.
Contrary to popular belief, the value of your home may not increase during the first few years so you’ll have to wait things out and spend several years paying down your mortgage if you want to see some ROI.
Homeownership is also generally a long-term commitment meaning you can’t just pick up and leave when you want to. You’d have to wait at least a few years and either sell or rent your home out if you wish to move somewhere else.
Other Financial Implications
Given the typical pros and cons of buying or renting a home, you must consider that there are other financial implications that can influence your decision. Debt is a big one, for example.
According to Student Loan Hero, the average class of 2016 graduate has $37,172 in debt and tuition prices are rising faster than inflation. Lenders look at your debt-to-income ratio when considering you from a mortgage to see if you can actually be able to afford a home.
If you’re looking to rent, your debt will still play a role in your ability to afford it which is why for the first time in 100 years, more adults between the ages of 18 – 34 years old are choosing to live with their parents over sharing a living space with a partner or living alone according to Pew Research Center.
Your income and other living expenses will also play a big role. If you are trying to buy a home that is our of your price range, renting may sound cheaper or vice versa.
So Which One is Better?
You’ll see mixed information everywhere online about whether it’s cheaper to buy a home or rent. At the end of the day, you have to live somewhere so I can’t give a universal answer as to whether renting or buying a home is better. It all depends on where you want to invest your money and how the pros outweigh the cons for each option.
Ultimately, the housing market in your area could determine whether it’s cheaper to rent or buy and what the better option is for you long-term.
In my area, renting and buying a home averages out to about the same investment. Rent can be a tad bit higher than a mortgage depending on how much you put down but overall, renting is cheaper for us at the moment because we’re not financially prepared for all the upfront and ongoing costs of owning a home.
This can and will change, however, just because renting or buying a home is cheaper for you right now, that doesn’t mean it will always be the case. Some people may own a home for a few years, then go back to renting or the other way around.
Before you let anyone tell you which one is cheaper or better, consider your own preferences, do your research on the pros and cons, and run some of the numbers.
Do you think renting or homeownership is better or cheaper for you at this time and why?
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Great points here. We are renters and will be for at least the next 5 years because we aren’t ready to settle down in one city yet. People often ask why we aren’t buying yet and to be honest, we would lose a ton of money if we bought a house, only to stay in it for 3 years or so. The flexibility of renting is a huge plus for us and our careers because we can always consider opportunities in new cities.
We’ve been paying rent for the past decade we’ve been living abroad.
Home ownership is actually something we look forward to, but for the time being we’re not exactly sure where we want to settle down.
On the plus side, our rent and total housing costs right now are extremely cheap, compared to properties in the same area. Our landlady is a very nice person as well, we’ve never had any problems with the apartment and we’ve also been paying the same rent for the past 5 years.
Right answer is it depends from you your partner and your workk. If you are going to stay in that place only few year rent is best deal… If you are going to stay in that place forever you can rent… Now there is also rent to buy option… But real right answer is depends
I’m a renter and I enjoy it. I eventually want to own, but right now renting equals less stress.
It depends on your circumstances. My wife and I rented for 5 years when we were younger and didn’t know where we would end up. It gives you flexibility. When we had a kid, we bought a place. It also depends on locations. Some places it doesn’t make sense to buy or maybe it’s too expensive…like NYC and SF.
To determine whether it is best to rent or to buy a house one would have to decide how long they would keep the house for, if purchased; then compare the after-tax cost of the mortgage for that period, to the cost or renting for the same amount of time. If purchasing a house the opportunity cost of the down payment should be considered as well. If renting, a individual can use the money saved from not making a down payment and invest it. Historically, the return on a conservative portfolio with a 60/40 equity to fixed income allocation is better than the amount of appreciation on a house (granted with current equity valuations approaching all time historical highs this factor might now be irrelevant). Maintenance cost for renting are most likely factored into the rental rate, so I would say no money is saved on maintenance cost from renting. Also, taxes can significantly affect your overall mortgage expense, if an individual is in a high tax bracket then the mortgage interest deduction from their taxable income can substantially lower their tax obligation.
Typically, however if an individual can buy a house at a bargain, with a low interest rate and if they expect to live in the house 5+ years. They can expect to pay less than renting. Ultimately the decision depends on the individual, these are just some of the financial aspects one should consider.