Whether it’s time to move out of your parents’ home soon and start living on your own, or you’ve been living in a rented/bought home for some time now and you’re thinking about changing your residential situation, the decision in front of you should not be taken lightly.
If you change your mind after signing the contract, you won’t be able to revert your decision easily. Luckily, we’re here to guide you in the right direction in terms of renting vs. buying a home.
Hopefully, after reading this article you will be able to determine which of these two options is right for you.
Renting Vs buying a home: which can you afford?
First of all, your decision-making process could be cut short very quickly if your financial situation doesn’t really present you with a choice. So, it’s a good idea to compare renting vs. buying a home in terms of upfront and recurring expenses.
1. Buying – upfront costs
Obviously, buying a home involves a lot more upfront expenditure. The most costly upfront expenditure comes in the form of down payment, a portion of the agreed purchase price (usually anywhere between 3.5 and 20 percent) that you’ll have to pay after closing the deal. Unfortunately, the down payment is just the tip of the iceberg.
For starters, there’s also something called “earnest money”. This amount, usually ranging from 1 to 3 percent of the final price, is politely given as a sign of goodwill.
Then, there are home appraisal and home inspection-related costs. Lenders will ask you to hire someone for a home appraisal in order to make sure that the purchase price corresponds to the realistic value of the home.
Lenders won’t ask you to hire an expert to perform a home inspection, but still, doing so is highly recommended, as these experts can spot defects that you might have missed. The price of both of these services usually ranges between 300 and 500 dollars.
The decision on renting vs.buying a home could be an easy one because buying comes with significant upfront costs. Alt text: Two people shaking hands in front of a house that one of them bought.
Next, you’ll also have to think about the homeowners’ insurance and property taxes. While the prices of the insurance vary, what remains constant is that you’ll have to pay for the first year right away.
As for the property taxes, they are usually paid every six months, which means that you’ll have to compensate the seller for every month that he already paid for. Finally, there are also the costs of moving itself.
While there is an easy way to save money when moving, relocating will further increase the already sizable costs. And we haven’t even mentioned all the buying upfront costs!
2. Renting – upfront costs
Renting is an obvious winner in this category, but this doesn’t mean that there won’t be any upfront costs to pay. Apart from having to pay the first month’s rent, you’ll also need to provide a security deposit (in some states, this deposit is limited to 1.5 times one month’s rent).
Apart from this deposit, you may also have to pay a nonrefundable deposit as well. This kind of deposit is paid only in certain situations,
for example, if you have a pet you may have to pay between 100 and 500 dollars. And of course, relocating your belongings still features in the upfront costs, especially if you intend not to risk anything and, for example, use professional boxes when moving.
3. Buying – recurring costs
Homeowners will have to cover a number of different recurring expenses. First of all, there are mortgage loan payments, that you will usually have to pay for between 15 and 30 years.
On the positive side, while paying off these loans, you’ll be slowly building up equity – the percentage of the home that you actually own. Equity is calculated by subtracting the amount you owe from the value of your home.
Once your equity reaches 20 percent of the total home value, you can get a better interest rate, or extend the overall time you have to pay off your loans. A mortgage calculator can come in handy when it’s time to do all the calculations.
Then, there’s the homeowners’ insurance (annually usually slightly more than 1,000 dollars), the property taxes, and the utility bills. Finally, you will also be responsible for all the maintenance and repairs, which is another expenditure that renters don’t have.
4. Renting – recurring costs
Apart from the monthly rent, you could also be paying a pet rent (if you didn’t already pay a nonrefundable deposit related to keeping pets), amounting between 10 and 40 dollars every month.
There’s also insurance, which you don’t have to buy, but we still recommend doing so (better safe than sorry).
It’s better to be insured, especially if you have this many beautiful items. Alt text: Beautifully designed and decorated apartment, the kind that could tip the scales in favor of renting in the renting vs. buying a home dilemma.
Utility bills also come into play, whether you’ll be paying them separately or they’ll be included in the monthly rent. And in case your home doesn’t come with a laundry machine, there’ll be some additional costs related to using a laundromat as well.
While it may seem like renting is a winner in this round too, with some clever tactics, this doesn’t have to be the case. For starters, you can rent out the home you bought, which can go a long way toward soon covering your expenses.
Then, there’s also the fact that homeowners can be subject to some tax benefits (for example, a homestead exemption exists in some states, making homeowners who actually live in the given home exempt of a portion of taxes they’d normally have to pay).
Also, increasing the home’s value through some home improvements means that your LTV (loan-to-value) will lower. LTV is calculated by dividing the current amount you’re owning with the value of the home. The lower your LTV is, the more benefits you might have.
5. Renting vs. buying a home: other pros and cons
Finally, if money is not an issue, let’s look at the battle of buying vs. renting a home in terms of some other pros and cons.
One of the main advantages of buying a home is exactly that – one day, you will have 100% equity. Mortgage payment rates can be seen as a sort of investment. On the other hand, all the rent money will be spent forever.
Being a homeowner also means that you can do whatever you want in terms of home design, additions to the home, and so on, which is a privilege renters don’t have.
Homeowners generally also feel like a part of the community more, as they tend to live in the same place longer.
Lovely homes and white picket fences – for most people, there’s something undeniably appealing about being a part of a tightly-knit community. Alt text: A white fence and a house behind it.
One of the advantages of renting is that you’ll be able to find a place easily even if your credit score is not that good. Also, it may sometimes happen that the landlord will pay for some (or even all) utilities. While not often, this can happen in some buildings.
On the other hand, as a renter, you’ll have less security. If you’re paying your mortgage increments regularly, no one can evict you from your home; however, when you are a tenant, you can’t be sure that you won’t have to be looking for another place to stay soon.
Similarly, monthly rent is subject to change due to the changes in the market or simply the whims of the landlord.
So, renting vs. buying a home: which is right for you? If you can afford both options, then it’s simply a matter of preference. Renting can make you more flexible, but with the disadvantage of not providing as much security.
Buying, on the other hand, makes you less flexible, but you’ll have a home that’s no one else’s, where you’ll be able to settle down for the rest of your life.
Whatever you choose – choose wisely, as making the wrong decision can have long-term consequences. While reliable real estate agents can help with anything, it’s still best not to rush.