Deciding whether you should rent or buy a home is a major decision. There are huge financial difference between renting and buying a home, some of which are highly dependent on your local market. Unfortunately, that means there is not a single answer whether renting or buying a home is cheaper for everyone. However, you can figure out whether renting or buying a home is a better decision for you by reflecting on your lifestyle, investigating your local real estate market and crunching the numbers.
Is Renting or Buying Better for Your Bank Account?
Financially speaking, renting is usually more predictable than buying a home, but not for the reasons you would think. Your rent is an agreed upon number for the term of your lease but it may rise each year if you decide to stay at the same home and sign a new lease. The increasing cost of rent may seem less predictable than buying a home with a fixed rate mortgage, but owning a home has many more unexpected costs.
Just like rent can rise for your rental, insurance and property taxes can increase for a homeowner. These increasing costs result in rising mortgage payments if you escrow your insurance and property taxes. Owning a home also requires quite a bit of maintenance which can be very expensive. In the short term, you may just have to fix small and inexpensive items around your house, like a leaky faucet. Over the long term, you will have to replace major systems as they fail. Replacing failing appliances, heating and air conditioning units and even your roof can get very expensive and costs thousands of dollars when you least expect it. The ongoing costs of maintenance, insurance and property taxes aren't the only financial considerations.
Big Differences in Cash Needed Before Move In
If you're buying a home, you'll also have to come up with a down payment and money for closing costs. Some special types of mortgages allow no down payments, but most loans require 3.5 to 20 percent down payments which could easily cost you tens of thousands of dollars. Renting likely will require less cash needed before you move in. You may have to pay your first and last month's rent as well as a security deposit, but some rentals require even less cash up front.
How Long Will You Stay?
You need to factor in the length of time you'll stay in a home when considering whether to rent or buy due to the high transaction costs of buying and selling a home. When you buy a home, you'll have to pay necessary closing costs that add no value to your home, such as survey fees, appraisal fees, title insurance and home inspection fees. Later when you sell your home, you'll have to pay even more fees, including real estate agent commissions, that could be as high as six percent of the selling price of your home. These costs could add thousands to tens of thousands of dollars to the cost of owning a home that you won't encounter when you rent.
Save Yourself a Headache and Use a Calculator
With so many numbers to keep track of, it is often easiest to figure out whether renting or buying is more financially beneficial by using a rent vs buy decision calculator. These calculators allow you to input many of the common financial variables between renting and buying and shows you how long you would have to own a home for owning to be more financially beneficial than renting.
Do What Is Right for Your Situation
While you can calculate whether renting or buying a home will be more beneficial for you financially, you should make sure to consider lifestyle factors just as much in your decision. Some people would rather own a home because it gives them a sense of security, even if it does cost them more in the long run. Others would rather rent so they could move at any time if a great job opportunity presents itself. In the end, you have to balance your finances and your lifestyle and come to your own decision whether you should rent or buy a home.