How to decide whether to rent or buy

Deciding whether to rent or to buy is a big financial decision. Taking an objective look at both opportunities can help you make the right choice for your lifestyle. For both renting and buying, you’re exchanging money for a place to live. The main difference between the two is the end goal — renting gives you a place to live for the length of your lease, while buying leads to homeownership.

Neither renting nor buying is better than the other. What we can tell you is that one of them might be better suited to you personally. Let’s look at some things to consider when renting and buying, and the pros and cons of both.

What to consider when renting vs. buying

One of the biggest, and maybe most overlooked considerations is that renting and buying varies by state. There are some states where renting is much cheaper than buying, and there are other states where buying is more affordable than renting. If you live in a city with high property taxes, for example, renting may make more sense. If you live in a city with low property taxes but high rent thresholds, it may make more sense to buy.

Some people look at renting as throwing away money, but this isn’t necessarily fair. You’re exchanging your money for a place to live. Not to mention, a landlord that’s responsible for your home repairs. Renting is a word we often associate with impermanence, but there are many people who have rented their whole lives.

If you opt for buying a home, you’ll have a monthly mortgage payment that goes toward building equity. This can be looked at as an investment, or even a forced savings account. But keep in mind — this investment isn’t liquid. Until you sell or refinance, your home is more of a liability than an asset. If you’re looking to liquify your equity, you can consider a cash-out refinance. A cash-out refinance lets you borrow money against the equity you’ve built up. Your lender will give you a new mortgage for more than what you owe so you can treat the extra money as cash. Homeowners often use this cash for home renovations or to pay off higher interest debt.

Owning a home means putting money into maintenance, renovations and repairs, on top of your monthly mortgage payment. Property taxes can go up and increase your monthly payments, or they can go down. A lot of things can change the value of your home in the short term, but you can end up profiting in the long term by selling or renting out your property. Staying in your home for five years minimum is often recommended to recoup or profit. 

The pros and cons of renting

Pros

• You don’t need to worry about maintenance or repairs. From a leaky faucet to a roof replacement, you don’t have to worry about the financial or logistical responsibilities. This can save you a lot of time and money.
• Short-term commitment. You can sign a lease for one year and move somewhere else after if you so please.
• Taxes and other local expenses are covered by landlord.
• Can be cheaper, depending on where you rent.

Cons

• Can get priced out of your lease. Unless your residence is rent stabilized, your landlord can raise prices with each lease until it’s something you can no longer afford.
• Must deal with a super or management company for repairs, assistance or permission to make home renovations.
• An overall lack of control. For example, repairs are on someone else’s timeline, and you can’t make major alterations to the space, unless you get permission.
• Can offer less stability than owning. Your landlord can sell the property, price you out or change the lease terms if you renew.
• No potential to build equity.

The pros and cons of buying a home

Pros

• Can be looked at as an investment that appreciates over time. Can potentially profit with a future sale or refinance.
• Autonomy over renovations and repairs.
• Pride in homeownership.
• Buying a home helps grow roots in a community. You’re more likely to get involved in local fairs and make friendships with neighbors.
• Potential mortgage tax write-offs. Check your local laws.

Cons

• More responsibility. If something breaks, it’s on you as a homeowner to find a professional to get it repaired.
• More financial responsibility. Your monthly mortgage payments don’t cover landscaping or maintenance and repairs.
• Paying property taxes.
• Money needed up front for closing costs, realtors, loan applications and more.
• Longer commitment needed for investment to pay off.
• Often stricter credit score requirements.

Questions to ask before making your decision

• What can I afford?
• How long do I plan to live here?
• Is it more affordable to rent or own in my city?
• How much are property taxes in my city?
• Am I hoping to profit from a home sale?
• What type of loan do I qualify for?
• Do I want the responsibilities that come with homeownership?
• What would buying mean for me?

The bottom line

There are many things to consider when deciding to rent or buy a home. How much you can afford, the length of time you plan on living there and how much responsibility you're ready to take on are all things to consider. Not to mention, the way real estate prices vary depending on the market and where you live. If you’re looking to learn more about homeownership and the type of loan you may qualify for, speak with a home lending advisor today.