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Rent Vs. Buy: How To Decide In 5 Steps

7-Minute Read
Published on February 28, 2022
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There’s no doubt that buying a home is a major life decision, but is it right for you? Of course, there’s no single correct answer, as there are pros and cons to both renting and buying. A major factor in your decision-making process, though, is your personal finances. In most cases, renting seems to be the more affordable option.

However, that’s not always the case. Your decision can boil down to several lifestyle considerations, such as whether you want flexibility or stability, what your career goals are and whether you want a place to truly call your own.

If you’re on the fence about whether you should rent or buy, read on to find out what you need to consider before taking the plunge.

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Rent Vs. Buy: 5 Steps To Making Your Decision

1. Decide How Long You Plan To Live In The Same Place

In other words, are you planning on putting down roots in your community or are you craving more flexibility?

If you feel certain you’ll stay in a home for at least 5 years, buying a home could make sense. That’s because it could be a good fit both financially and emotionally – you can put personal touches on your home and really make it feel like it’s yours.

However, renting may be the better option if you prefer to be more nomadic. For example, let’s say you’re really hoping to get that job promotion – but it’s halfway across the country. You don’t want to have to deal with the hassle of selling a home while transitioning to a new position. Or perhaps you’ve moved to a new area and want some time to get to know different neighborhoods before settling down somewhere.

You can buy a home and then sell it within a few years, but the costs are hardly worth it. Aside from initial closing and moving costs, you may be paying more closing costs when selling a home in addition to other costs, such as repairs and renovations that would make the house sell for top dollar.

2. Estimate The Cost Of Renting Vs. Buying

Occasionally, renting can be cheaper than buying a home because of the upfront costs involved. This includes a down payment, closing costs, moving costs, any renovations and other home maintenance tasks.

That said, just because you can afford a mortgage payment doesn’t mean you can afford to own a home; expenses add up. In addition to a monthly payment that’s more than the principal and interest on your mortgage, you’ll also have property taxes, homeowners insurance and (in many cases) mortgage insurance as well as homeowners association (HOA) fees.

On the other hand, buying a home is almost always cheaper in the long run and it offers you an opportunity to build equity. Hopefully, your home will have increased in value when you sell it.

In most areas of the U.S., buying a home is actually cheaper. According to a National Association of REALTORS® report, after 6 years, a homeowner’s mortgage payment is lower than that of a renter. This is assuming the rent has a 5% increase each year and the homeowner is paying a fixed monthly payment.

There are also tax savings to being a homeowner, though with the most recent tax changes there may be limits as to how much mortgage interest, state and local property taxes you can write off. According to the same report from the National Association of REALTORS®, a homeowner’s payment will be less than a renter’s payment after 3 years.

That’s not to say you should dive right into homeownership. It’s perfectly fine to rent for a few years, save up and purchase a home if you’re set on having a place of your own. The savings in costs of being a homeowner also assume you’ll stay in a home for the long term and may not factor in maintenance costs.

However, if you do pay off your mortgage and continue to live in the home, the savings can be significantly greater even with home maintenance costs.

3. Mobility Vs. Putting Down Roots: Which Is More Important To You?

Even with the best of intentions, it’s hard to predict what can happen next in your life. If you intend to stay in one place for a long time and have the financial means to do so, buying a home makes the most sense.

However, it’s important to take a look at your current life situation and think about whether or not it’ll change within the next few years. If it does, your housing needs could also change and you may want to hold off on buying a home.

For example, you and your long-term partner may have just gotten engaged and plan on getting married in the next 2 years. In this case, buying may not make sense. Maybe you two want to figure out how to combine your finances and work out your budgeting routine before adding a home into the mix.

Or let’s say you and your spouse just got married and you aren’t sure if you want to start a family quite yet. If you have any inkling that you might want to have children soon, you shouldn’t buy a home that’s not going to accommodate a growing family in a few years.

In both these cases, it might be a good idea to rent so you have time to figure out what you want in a home, what your budgeting needs are and what kind of home might be the best fit for the lifestyle you hope to have in the future.

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4. Weigh The Risks Of Renting And Buying

There are risks for both renting and buying a home to keep in mind. Although you can build equity when buying a home, there are some financial risks. For example, if you sell your home sooner than planned, you may not be able to make up for what you spent in closing costs or renovations.

Let’s not forget about home maintenance costs. These are expenses you’ll need to pay to keep the home in top condition. Think checking air filters and vents, testing fire alarms, landscaping and fixing plumbing issues, among other repairs.

If you’re focused on other life goals, like a career that requires you to travel often, or if you have multiple young children to attend to, adding home maintenance to your list of responsibilities may not be the best choice.

On the flip side, renting means you will never have the opportunity to build equity wealth. Your monthly rent could go up at any given moment. You’re also at the mercy of your landlord, such as being asked to move out or having to deal with maintenance requests being deferred.

5. Assess Your Financial Situation

It’s important to note that you need to be realistic about your financial situation when deciding between renting and buying. Once you estimate the costs of renting versus buying, be honest about whether you can afford other upfront costs like a down payment, repairs, moving costs and buying new furniture. Consider using our Mortgage Calculator to estimate your monthly payments as well as how much home you can afford.

In either case, do some careful budgeting so no matter what you choose, you’ll be able to afford to buy or rent.

Renting Vs. Buying A House: Pros And Cons

Aside from your personal situation, there are some objective benefits and drawbacks to renting and buying that will exist in most scenarios.

Renting Pros And Cons

Pros

  • Mobility/freedom to move around
  • Landlord pays for maintenance
  • Doesn’t require expensive closing costs
  • No fluctuation in monthly housing expenses
  • Allows you to test-drive different living spaces

Cons

  • You don’t build any equity
  • Limited ability to customize your living space
  • Rent could go up over time
  • Landlord might sell or decide to stop renting
  • Limited sense of home stability/permanence

Buying Pros And Cons

Pros

  • You build equity wealth over time
  • Home value may increase over time
  • Unlimited freedom to customize your living space
  • You may enjoy tax benefits
  • Sense of home stability/permanence

Cons

  • Closing costs can be expensive
  • Responsibility for maintenance and repairs, which require time and effort
  • Less flexibility to move (at greater difficulty/expense)
  • Home value may decrease
  • Recent tax laws potentially reduced tax benefits

Rent Vs. Buy Calculator

Whether you would save more by renting or buying can depend on a few key factors. One is your location and the prices of other homes or rentals in your area. Next, you need to consider your credit score and if a lender would find you creditworthy.

After factoring in a home’s purchase price, down payment and closing costs, as well as a monthly mortgage cost, compare that to the monthly cost of rent and subsequent assumed costs over a period of time. You’ll be able to see the differences between costs as well as the perceived equity you would’ve built up in a home.

In order to see for yourself whether it makes more sense for you to buy or rent, try our Rent vs. Buy Calculator.

Apply Online with Rocket Mortgage

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

Apply Online

The Bottom Line

There isn’t always a clear answer to the question of whether to rent or buy. Depending on your life situation and finances, the answer might change over time. There are other options, such as a rent-to-own property, where you start out renting then move on to becoming a homeowner. No matter what decision you make, it’s crucial that it’s an informed one based on your financial situation and lifestyle.

If you’re ready to begin the home buying process, you can get started online with Rocket Mortgage® today.

Patrick Chism

Born and raised on a farm in the Ozarks, Patrick has a knack for making the best out of the worst situations. Where others see flooded farmland, he sees lakefront real estate. Where others see an infestation of bees, he sees free pollination and a upstart honey shop. Patrick’s articles will help you make the most out of the least, maximizing your returns while keeping a close eye on the wallet. When he’s not writing for Rocket Mortgage, Patrick likes hiking, gardening, reading and making healthy foods taste like unhealthy foods.