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Buying Vs. Renting: What Makes The Most Sense For Me?

10-minute readFebruary 04, 2021

The decision to rent or buy is one that is based on a number of factors – most importantly, the lifestyle you want and can afford. When choosing the best option for you, compare the benefits and disadvantages of each while considering your financial situation and your future goals. Don’t know where to start? We can help with that.

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Pros And Cons Of Renting

When you consider renting, what interests you most about it? Is there anything that concerns you? Have you even considered these questions? One of the best ways to see if renting is right for you is to list what you like about renting and what you don’t like. Then, see what matters more.

Pros Of Renting

  • No maintenance or repair costs
  • No property taxes
  • Shorter-term commitment
  • Flexibility to move around to different locations
  • No market risk or worry over home value
  • Rent may include some utility costs
  • Access to amenities, like a gym or pool
  • Ability to live in an area you can’t afford to buy in
  • Lower insurance costs

Cons Of Renting

  • Governed by a landlord
  • Cannot make permanent changes to the property
  • No tax incentives
  • You may never own the property
  • Little to no return on investment
  • Rent can go up upon lease renewal
  • No guarantee the lease will be renewed

Pros And Cons Of Buying

Purchasing a home is an important life decision, and you should consider the pros and cons even if you aren’t deciding between buying and renting. It’s often a more emotional decision than renting is, so make sure to reflect on the emotions you may feel. These should be a part of your lists or added to the ones we’ve provided below.

Pros Of Buying

  • Ability to build equity and get a return on investment
  • Tax incentives for interest paid
  • No landlord to answer to or rules to follow
  • Ability to make permanent changes to the home
  • Ability to achieve homeownership once mortgage is paid off
  • Elimination of monthly payments once the loan is paid off
  • Ability to put down roots

 Cons Of Buying

  • Maintenance and repair costs
  • Additional costs like property tax and homeowners insurance
  • Substantial upfront costs
  • Market risk and worry over declining home values
  • Long-term commitment

As you can see from some of these pros and cons listed, one of the biggest factors in deciding to rent or buy is the impact your decision could have on your finances. Let’s take a look at some of the most common upfront and long-term costs of each.

Upfront Costs Of Renting

Initial renting costs may seem like a lot of money upfront, but they typically won’t have as much sticker shock as the upfront costs of buying a home. You may even get some of those renting deposits back. Here’s a breakdown of the typical upfront costs of renting.

First And Last Month’s Rent

As the name suggests, first month’s rent takes care of your first month of rent. It can also give the landlord insight into the type of tenant you’ll be when it comes to making payments. If you are late giving them the first payment or your check bounces, they could see that as a red flag.

Last month’s rent helps protect the landlord should you vacate your apartment before your lease is up. That rent payment will cover a month of rent while the landlord looks for a new tenant. If you stay until your lease is up, that deposit will pay for the last month you are there, allowing you to save a month’s worth of rent for the next place you’re moving to.

Security Deposit

Landlords want to keep their properties in the best condition for prospective renters. Sometimes, tenants will move out and leave a mess or severe damage to the property. Security deposits are usually 1 – 2 month’s rent and are used to pay for the costs to clean and repair the property if needed. If no cleaning or repairs are needed, tenants will get their deposit back. As such, security deposits also help motivate the tenant to keep the property in good condition so they can earn some money back at the end of their lease.

If you don’t terminate your lease early, never miss a payment and leave the property in great condition, you should expect to get your full deposit back. If you don’t get your deposit back or only get part of it back when you move out, your landlord should provide an explanation and a copy of the receipt or invoice for each payment. You should not be charged for normal wear and tear that comes with day-to-day living.

Pet Deposit Or Fee

If you’re planning on moving your furry friend in, you may have to pay a pet deposit or fee to take care of any damages your pet may cause to the property. Typically, pet deposits are refundable while pet fees are not. If you have a pet deposit, you may get it back if there is no damage to the property because of your pet.

Recurring Costs Of Renting

Once you pay the upfront costs, you may think you’re just required to pay the monthly rent from there on out. However, depending on the type of property you rent, the guidelines laid out in the lease and what fees are rolled into your monthly payment, you may have certain recurring costs beyond the monthly rent amount.

Utilities

Some of these may be included in your rent while others are not. Typically, utilities such as electricity, heat, water and garbage removal are included in rent while you are responsible for cable and internet. Each rental property is different, so make sure you get a breakdown of your rent payment before signing a lease.

Renters Insurance

This helps protect you and your belongings in case you need to replace them due to theft, fire or other damage. It’s usually not a requirement but is a good idea to have. Shop around for the best rates.

Laundry Fees

If you do not have in-unit appliances, you may have to pay to use your building’s washer and dryer or the laundromat’s machines.

Parking 

Some apartments will provide free parking, but if you live in a major city or another highly-populated area where parking is scarce, you may have to pay for a guaranteed spot.

Amenities 

Whether or not you use the pool, gym or clubhouse, you may have to pay for them.

Changes To Your Rent

When considering costs, remember that rent typically goes up each year with inflation or when there is a new landlord or management company taking over.

Costs Of Buying A Home

Buying a home is a big initial investment. First-time home buyers tend to focus so much on the down payment that they don’t realize there are other costs they’ll be required to pay at the closing table. While the initial costs will depend on the type of loan you have and your purchase agreement with the seller, there are a few expenses that are typically required when buying a home.

Down Payment

A down payment is the amount of money you pay upfront when you buy a home. It goes toward paying the price of the home. The good thing about a down payment is that it reduces the amount you borrow from the lender and contributes to the equity in the home. The bigger your down payment, the better. While most mortgages require a minimum down payment of 3% of the purchase price, 20% is recommended since it removes the need for and the cost of private mortgage insurance (PMI). If you have a conventional loan, a lender may also waive the escrow requirement if you put down 20%, which will lower your monthly payment as well. Keep in mind that if that does happen, you’ll still be responsible for paying your property taxes and homeowners insurance. It won’t just be rolled into your monthly payment.

Closing Costs

Another payment that’s due at closing is the one for closing costs. These are the fees associated with getting a mortgage and transferring the property from the seller to the buyer. Closing costs are typically around 2% – 6% of the purchase price and may include the appraisal and inspection costs, the application fee and the loan origination fee.

First-time home buyers may also make the mistake of only considering their monthly mortgage payment when they think about the costs that come after buying. Along with your monthly payment, there are also a number of costs that come once you own the home, too.

Home Maintenance Costs

Now that you’re the homeowner, you’re in charge of the upkeep of your home and the cost to repair or replace appliances. On top of that, you may have to buy certain equipment to care for your home that you didn’t need while renting. This may includes items like tools, outdoor garbage and recycling bins, a lawnmower and a snowblower.

Utilities

A monthly rent payment often includes at least some utility costs. A monthly mortgage payment won’t. You’ll be responsible for paying all utilities including electricity, heat, water, garbage pickup, cable and internet. And if your home is bigger than the property you rented, expect your utility costs to be higher as well since there is more space to light, heat and cool.

Homeowners Association (HOA) Fees

If you live in a community with a homeowners association, you may be required to pay fees to cover community maintenance and event costs.

Private Mortgage Insurance (PMI)

If you put less than 20% down, your lender may require you to pay for private mortgage insurance. This protects the lender should you default on your payments.

Homeowners Insurance

A requirement of getting a mortgage, homeowners insurance helps protect you and your lender if something happens to your property.

Property Taxes

As one of the highest homeownership expenses, property taxes are calculated annually and typically change each year. Tax costs often jump within the first few years because the property can be reassessed under new ownership. After a few years, they taper off and don’t change too drastically year over year.

Changes To Your Monthly Payment

It’s important to understand how your monthly payment breaks down. It isn’t just your remaining loan amount (principal balance) divided up over the life of your loan. It may also include PMI and escrow (taxes and insurance). These additional factors may change each year and affect your overall monthly mortgage payment, causing it to increase or decrease. Your monthly payment may also change if you have an adjustable rate mortgage (ARM), which can increase or decrease your payment based on changes to interest rates (also included in your monthly payment).

Apply Online with Rocket Mortgage®

Get approved with Rocket Mortgage® by Quicken Loans® – and do it all online. You can get a real, customizable mortgage solution based on your unique financial situation.

Is It Cheaper To Rent Or Buy?

The simple answer is: It depends. You’ll have to consider how long you live in the property and whether you count return on investment in your calculations.

When you look at it in the short term, renting is often cheaper than buying. The upfront costs of renting can be significantly lower than those of buying. Moreover, month-to-month costs may also be less expensive when you take into consideration such additional costs as maintenance, taxes and insurance.

The financial advantages that come with owning a home don’t happen right away; they are more long-term. Building equity in your home is a slow process. One way to build equity in your home is to pay down your mortgage, which can be done by making your monthly payments and by paying extra if you choose. The other way is to wait for your home value to increase. Neither of these options build equity overnight. It can take years to accomplish this.

Here’s another thing to consider: The money you’re paying on your mortgage does not hold the same value as the money you’re paying in rent. When you pay rent, that money goes to the landlord. When you pay your mortgage, part of that money goes to paying off your loan, adding to the equity in your home. Once you pay off your loan, you get to own the home and the mortgage payments stop. And when you sell your home, you’ll be getting a return on that investment if it sells for more than what you paid for it.

Should You Rent Or Buy?

The decision to rent or buy a home is yours alone and it isn’t one that should be taken lightly. It requires you to reflect on who you are and the lifestyle you want, consider your financial situation and think about your future.

Questions To Consider

 When deciding whether to rent or buy, ask yourself the following questions:

  • What can I afford?
  • How much money do I have saved?
  • Am I looking for more stability or do I need flexibility?
  • Where do I see myself in 5 years?
  • What kind of career and family goals do I have?
  • Am I ready to take on the responsibilities of homeownership?
  • Why do I want to buy a house?
  • What’s the housing market like?
  • Where do I want to live?
  • Am I rushing into a decision?

How you answer these questions can help you determine whether you should buy or rent. There will be other indicators, too.

When You Should Rent:

  • You don’t have enough money saved for down payment or closing costs.
  • You do not have an emergency fund.
  • Your debt-to-income ratio (DTI) is above 50%.
  • You plan on moving in the next few years.
  • You’re not ready to commit to housework and home maintenance.
  • You have a lot of unknowns about the near future.
  • You’re working on improving your credit score.
  • You are living paycheck-to-paycheck.
  • You are not in a stable job.
  • You want to live in an expensive area or a downtown location that you can only afford to rent in.

 Signs You’re Ready To Buy:

  • You have enough saved for the required down payment.
  • You have enough money saved to pay for closing costs.
  • Your DTI is low.
  • You have an emergency fund that can withstand job loss, repairs, illnesses and other emergencies.
  • You have a steady job.
  • You plan to stay in the home for at least 5 years.
  • You know what kind of home you want, where you want to live and what you can afford.
  • There’s room in your budget for additional costs.

Are You Ready To Purchase A Home?

If you’ve weighed the pros and cons, considered the costs, asked yourself the right questions and discovered that all signs point to buying a home, the next step is getting approved for a mortgage. This step helps you understand how much home you can afford and shows real estate agents and sellers that you are willing and able to purchase a home. You can get started on your home buying journey by visiting Rocket Mortgage® by Quicken Loans online or by calling us at (800) 785-4788.

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