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Many of us dream of becoming homeowners. But is that actually the best decision for your financial future?
When it comes to renting vs. buying a home, there are many factors to consider. Each option can be better than the other in certain situations.
This guide takes an in-depth look at the question. Keep reading to learn how to decide which option makes the most financial sense for you.
The state of the economy and real estate market can have big impacts on whether you should rent or buy a home. When interest rates are low, homebuyers pay less to borrow money for a mortgage.
Unfortunately, the opposite is true today. Mortgage rates remain high relative to the last decade. This means that unless you’re paying cash for a home, it’s going to cost you more to buy today than it would have in the past.
Home sellers also have to contend with higher interest rates, too, as they search for a new home, and some are choosing to avoid the housing market altogether until rates settle.
That doesn’t mean you should rent a home or apartment instead of fulfilling your dream of buying a home. But it does suggest you may be able to get a better deal by waiting to buy until interest rates come down again — unless you can find a fantastic purchase price.
The economy is just one factor to consider when choosing to buy a house or rent. We take a look at some of the financial differences between these two options throughout the next section.
One key difference between rental properties and owning a home is where your monthly payments go. Monthly rent payments go entirely to your landlord based on the terms of your rental agreement. But mortgage payments go toward paying off your home loan so that you own a higher and higher percentage of your house over time.
Put another way, you lose anything you put toward the cost of renting your home. When you own your home, you get back at least a portion of your mortgage payments in the form of increased equity.
Taxes are another factor to look at when considering the pros and cons of buying a house. On one hand, you’ll have property taxes to worry about. These are typically a percentage of your home’s appraised value and are due annually.
On the other hand, there are also tax benefits to home ownership. You may be able to deduct a variety of your housing expenses, including:
Whether the cost of property taxes outweighs the new tax deductions you qualify for will depend on your personal financial situation. It’s something a financial expert at Fidelity Bank can help you calculate if you want assistance.
To buy a home, you typically need a good credit score and enough upfront capital to make a meaningful down payment. Your monthly mortgage payment could be higher than what you would have paid for an apartment because of expenses like mortgage insurance that get folded into it. But this can vary based on your down payment amount and housing prices in your area.
This means your annual living costs may or may not go up when you buy a home. But you will have more large expenses for repairs, improvements, and property taxes to save for. These may help to increase the value of your home over time, but that’s not guaranteed. Property values can go down as well.
The alternative is to continue renting and put all of that extra cash into equity investments. If you expect your equity investments to go up more than your property value, then renting could be a better use of your money from a purely financial perspective.
Your decision to rent or purchase can also depend on how you feel about the responsibilities of homeownership. Landlords usually handle property maintenance, but as a homeowner, that becomes your job.
These new responsibilities carry financial burdens. The average homeowner now pays nearly $15,000 a year in hidden costs, which include unexpected maintenance bills. You’ll also need to either take time out of your schedule to complete jobs around the house or hire someone to do it for you, which only adds to your maintenance costs.
One reason there’s no clear answer between buying and renting is that each choice offers some benefits the other doesn’t. This may be most apparent in the differences between lifestyle choices and location flexibility.
Renting an apartment gives you more freedom of movement. If you want to live in a different part of town or leave your city altogether, you can do so as soon as your lease expires.
Homeownership is more complicated to get out of. You have to put your home on the market, keep it in great condition until you find a buyer, and pay closing costs before you’ll be able to move on.
At the same time, homeownership gives you a level of lifestyle flexibility that renting an apartment can’t match. You’ll be able to change your living space as much as you want and behave more freely without having a landlord to worry about.
This is why financial wellness is just one factor to consider. Your future goals and lifestyle preferences can also influence whether buying or renting is right for you.
There are also different finance and insurance requirements to think about. If you buy a home, you’ll need homeowners insurance and, depending on the down payment you can afford, private mortgage insurance. You won’t have those costs as a renter.
The same is true for financing. Homeowners need to have a strong credit score and meet other criteria to qualify for a mortgage. Renters may need good credit scores and strong income to qualify for some apartments. But there are often renting options for folks with poorer financial credentials.
Ultimately, renting or owning a home could be better for your goals. It really comes down to how you feel about the benefits of renting vs. buying.
It may be smarter for you to buy a house if you:
But renting could be a better option if you:
Whether you decide to buy or rent, it’s important to make sure that your monthly housing costs fit into your budget. Fidelity Bank can help you do that — whether that means finding the right purchase price for a new home or getting help finding a more affordable option for housing.
We’re a community bank with more than a century of experience helping everyday people make smarter financial decisions. We’d love to do the same for you.
Take a look at our personal banking solutions to learn more about how we can help, or contact a banker today to get started.
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