Is It Better to Own a Home or Rent?

Renting vs. Owning a Home: What's the Difference?

Buying a home is a massive decision and commitment. If you're a renter who's been warned that you're wasting money or aren't successful if you haven't bought a home yet, don't fret.

The reality is that renting makes sense for certain situations and locations, like for people in expensive big cities, who move for work or who need time to save for a down payment. Renting offers flexibility, with low-commitment leases and few, if any, maintenance and repair costs.

Homeownership anchors you to a location for longer, and you're on the hook for repairs—plus hefty upfront expenses like down payments and closing costs. But there's plenty of good too: Buying allows you to make a place your own, with no time limits on how long you can stay. You also build equity, which you can use to borrow against or profit from when you sell.

Homeownership can be truly rewarding if you know where your budget and credit stand and you've considered all advantages and drawbacks.

Pros and Cons of Renting a Home

Renting can be a solid solution, especially in the short term, but there are benefits and drawbacks to consider.

Pros

Renting doesn't allow you to build wealth in a home, but it comes with benefits homeownership doesn't offer, including:

• Flexibility and freedom: Whether you move frequently for work or you're not sure if you'll like a neighborhood, renting isn't a major commitment and won't tie you down nearly as much as owning. Leases often only last a year, and if you must leave sooner, breaking a lease is easier than selling a home. Some landlords even allow month-to-month renting, especially after the first full year.
• Minimal maintenance: Landlords are generally required to handle repairs for tenants, and some pay for maintenance like lawn care. For homeowners, all maintenance and repair costs come out of pocket unless you have a warranty or something is covered by homeowners insurance. Even then, you may owe a steep deductible.
• Credit matters less: When you apply to rent, your prospective landlord will usually run a credit check. While poor credit may disqualify you, the landlord may be lenient if you have solid income or a reference. The credit and other financial requirements for a mortgage are far stricter, and lenders closely scrutinize your income, assets and debts. If your credit needs improvement, it will likely be easier to get approved for a rental than for a mortgage.
• Easier to save: Renters aren't responsible for paying fees such as property taxes or homeowners insurance premiums, which can lower the cost of housing. Additionally, getting roommates can bring rent down to a fraction of a mortgage payment. Because short-term costs of renting are often lower than owning, it could free up money to shore up your emergency fund, pay down debt or save for a down payment.

Cons

While renting a home can be a wise choice for some, it does have some drawbacks, including:

• Lack of financial incentives: While it's not guaranteed, many homeowners profit when selling; but when you leave a rental, you don't get any rent money back. Renters also can't take advantage of homeowner tax deductions. On top of that, landlords don't usually report rent to credit bureaus, meaning your positive rent payment history won't improve your credit. Ask your landlord about having your on-time rent payments added to your credit report. On the other hand, breaking your lease can hurt your credit.
• Rent increases: Unless you're in rent-controlled housing, you may be subjected to regular rent increases. Gradual, single-digit increases were once the norm, though in recent few years, it's become common to see rent jump in high-demand areas over 10%, or even above 20%, year over year. Some markets are finally cooling off, but either way, rent increases are out of your control and can make budgeting tricky—or force you to move.
• Less housing security: Even if you love your rental and want to stay, your landlord doesn't have to renew your lease. They may decide to sell the property or move in themselves, or they could price you out with aforementioned rent increases. That means renting provides less stability and housing security than owning.
• Minimal personalization: Renting limits your ability to make your space your own, with leases limiting everything from pets to aesthetic tweaks. Updating creaky floors or knocking down an oddly placed wall might be doable for homeowners, but tenants typically can't make significant alterations to a rental. Your landlord may allow light redecorating, such as repainting walls, but you might be required to undo changes before moving out. Failing to clear DIY work with your landlord could result in losing your security deposit.

Pros and Cons of Buying a Home

Buying a home is a complicated decision that's full of potential benefits and pitfalls.

Pros

For those who can afford it, owning a house has major perks, including:

• Building wealth: Every mortgage payment builds equity and brings you closer to full ownership and no more monthly payments (though you still pay taxes and other ongoing costs). If your home appreciates in value, whether due to a hot market or improvements, you could profit upon selling. Additionally, when you build equity, you can borrow against it in the form of a home equity loan or line of credit.
• Tax breaks: Only homeowners can take advantage of property tax deductions and claim mortgage interest deductions on taxes. Since most of your monthly payment goes toward interest initially, a mortgage interest deduction could considerably cut your tax bill.
• Freedom to customize: Your home is your own, and with no landlord looking over your shoulder, you're free to renovate it. Those improvements can also boost the home's value.
• Positive effect on credit: Unlike rent, mortgage payments are added to your credit report since they're reported by your lender. If you consistently make on-time payments, you may improve your credit score. If you don't already have an installment loan, adding one to your credit mix can also help your score.

Cons

Buying a home can be a beneficial long-term financial strategy, but be aware of potential drawbacks:

• Extra costs: Expenses beyond a mortgage payment add up quickly. There's a down payment, closing costs, property taxes, homeowners insurance, private mortgage insurance (PMI) and so on. Repairs also get expensive fast, and with no landlord, it's all on you. Don't forget about things that require maintenance, like heating and cooling systems, and routine upkeep like lawn care and pool care.
• Potential decline in value: Home values often appreciate, but not always. Your neighborhood could become less desirable, or the housing market may decline, resulting in an appraisal for less than what you paid. If you plan to live in your home forever, it may not matter, but if you hope to sell, there's no guarantee you'll come out ahead.
• Difficulty relocating: If something requires you to move, selling a home is a more complicated and expensive endeavor than ending a lease. You also may be responsible for paying closing costs, transfer tax, real estate agent commissions and other fees once the sale goes through.

Is It Cheaper to Own a Home or Rent?

In general, the short-term costs of renting are far lower than the costs of buying a home. When you look at the big picture, however, a mortgage could be cheaper in the long run.

For as long as you rent, you'll be making a monthly payment. With a mortgage, you should eventually finish making payments, decreasing your costs. Additionally, if you take out a fixed-rate mortgage, your payments stay steady throughout the life of your loan, while rent can—and likely will—increase over time.

Here's a quick look at how the short-term costs of renting compare to buying:

Costs of Renting a Home

• Upfront security deposit
• Upfront rent (some landlords just require the first month before move-in, while others may also require the last month as well)
• Monthly rent payment
• Optional renters insurance
• Utilities

Costs of Buying a Home

• A mortgage down payment (usually anywhere from 3.5% to 20% of the purchase price)
• Private mortgage insurance (for conventional mortgages when you put less than 20% down)
• Property taxes
• Homeowners insurance
• Utilities
• Possible homeowner's association fees
• Ongoing maintenance and repairs

Should I Rent or Buy a Home?

There are compelling pros and cons for both renting and buying, and what's right for you depends on your unique situation. Just because renting is cheaper in the short term doesn't mean you shouldn't consider buying a home, though leaping into a mortgage isn't always the right move either.

You have to consider your financial situation and goals, the cost of renting and buying in the local real estate market, and the terms of a mortgage you can qualify for.

To determine if you're prepared for a mortgage, assess what you've saved for a down payment and what you could reasonably afford for a monthly payment. Leave enough room in your budget for other home-related expenses, like closing costs, ongoing maintenance and savings for repairs. Don't forget to include non-house savings, necessities, debt payments or any other financial goals. If buying would create too much of a strain now, there's nothing wrong with continuing to rent while you save and build more financial cushion.

Consider Your Credit Before Buying

When mortgage lenders review your application, they closely scrutinize your credit, so it's essential to check your credit report before house shopping. Your credit and other factors, such as your debt-to-income ratio, are important to lenders deciding whether to approve your mortgage application and what interest rate and terms to grant you. If there are blemishes in your credit history, it's best to work on them before applying since a lower interest rate could save you thousands over the life of your mortgage.