Renting vs. Buying: Pros and Cons of Renting or Buying a Home

Renting comes with several benefits:

• Lower initial costs. When you sign a contract to rent a property, you don’t have to pay any of the costs associated with buying, like down payments, closing costs, or real estate agent fees. Instead, your upfront costs when renting usually include a security deposit (often a month or two of rent) and the first month’s rent.
• Little to no maintenance. When you rent a property, you’re usually not responsible for the maintenance. If there’s a major leak or if something breaks, your landlord or property manager will coordinate and pay for repairs. Depending on your contract terms, these small home maintenance tasks can include lightbulb replacements, snow removal, landscaping, garbage removal, or yard upkeep.
• Lower ongoing costs. Renting is usually limited to two or three monthly costs: rent, utility payments (gas, electricity, Wi-Fi), and renter’s insurance (often optional). In the long run, rental costs are often lower than the recurring costs of buying, which include monthly mortgage payments, renovation costs, property taxes, and insurance premiums.
• More flexibility. Renting is much more flexible than buying, with one-year contracts or month-to-month options for lower commitments. Renting can be a good option if you’re unsure whether you want a long-term stay in an area. When it comes to moving, buying is more rigid because you’ll either need to sell the house or find renters.

There are a few major disadvantages to renting:

• No equity. Paying monthly rent payments doesn’t build equity (the home value versus the size of the mortgage). Home equity is a valuable form of collateral that homebuyers can use to apply for loans. When you’re renting, you don’t have access to this borrowing power and have less leverage with lenders.
• Limited improvement ability. Renters have limited options for improving the property—landlords often have strict rules that don’t allow major property changes. In the end, renters can typically use interior decorating techniques (like furniture placement and removable wallpaper) to update or improve their space. In contrast, homeowners have much wider freedom, only subject to their local homeowners’ association or building codes.
• Less stability. When renting, you’re living on the property with the permission of the landlord or owner. If they choose to stop renting the property (for instance, if they decide to sell it), they don’t have to renew your rental contract, and you’ll have to find a new place to live. Landlords can also evict tenants for many reasons, including if a renter violates specific terms in the lease.

Here are some of the benefits of homeownership:

• Equity. Buying a home and paying monthly mortgage payments builds equity—the home’s value versus the size of the mortgage. Equity is a valuable form of collateral that you can use to apply for loans to cover everything from renovations to college tuition. Building equity is one of the biggest advantages of buying a home.
• Renovation freedom. When you buy your own home, you’re free to make renovations to it as you wish (within the bounds of your local HOA or building codes). From fresh paint to knocking down walls, you can update and improve the space to your preference.
• More stability. Buying a house offers a significant amount of stability over renting. Homeowners are not subject to a landlord who can increase the rent on relatively short notice or serve them with a notice to vacate the property. Homeownership provides a bit more financial predictability, depending on the interest rates you lock-in. If you select a 30-year fixed-rate mortgage, you can anticipate consistent costs for the foreseeable future because the rate will not change throughout paying off your loan.
• Tax benefits. Owning property can sometimes offer specific tax savings and standard deductions, such as the mortgage interest deduction. This tax deduction allows homeowners to deduct mortgage interest payments from their taxable income.

Home buying can have some drawbacks—here are some of the biggest:

• High upfront costs. Whether you’re a first-time home buyer or an expert, the biggest barrier to buying property are the significant upfront costs of a home purchase. To buy, you’ll need to pay a down payment (usually around 20 percent of the home’s purchase price), pay closing costs (usually about 3 to 5 percent of the total cost) and other additional costs and miscellaneous fees (like paying your realtor or escrow agent).
• Higher ongoing costs. While your home loan payments may be less than what you’d pay in annual rent, other additional personal finance costs come with owning a house, including homeowners insurance, mortgage insurance, maintenance costs, renovation costs, and property taxes.
• Market fluctuation. Buying a house doesn’t automatically grant you a fixed-price asset. Home prices and variable mortgage interest rates can fluctuate wildly with the real estate market. If you own a house, you’ll be much more affected by swings in the housing market, and your borrowing power can rise and fall drastically as the market changes.
• Less flexibility. Buying a house is much less flexible than renting—when you buy a home, it’s much more challenging to move out since you’ll either need to sell the dwelling or find renters. Rentals usually operate on annual renewable leases or month-to-month, making it easier to pack up and move to a new opportunity.
• Credit score may dictate interest rates and loan approval. If you want to apply for a mortgage loan and have a credit score under 600, you may face challenges getting loan approval from a credible lender or face higher interest rates. Conversely, renters don’t need to have a great credit score to lease an apartment. However, those with poor credit may have to put down a larger security deposit to prove their trustworthiness to the landlord.

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