Choosing where to live is an exciting process. Your imagination can run wild, envisioning your life as you browse through listings and compare new neighborhoods and cities, or perhaps even states and countries. Maybe you want that darling flat in the middle of a vibrant street with shops below, or a secluded plot of land in the mountains. Of course, the financials come in at some point in the daydream. Naturally, considerations of finances enter the equation, reminding us that while we aspire for our ideal home, it’s crucial to strike a balance between our dreams, needs, and budget. Finding that perfect place where comfort meets affordability is all part of the exciting quest for your next chapter in life!
What’s more, owning real estate has long-term financial implications beyond which housing option fits best in your monthly budget. Home equity is a primary driver of net worth in the United States, and property tax considerations are important as those continue even after your mortgage is paid off.
Past conventional wisdom instructed that buying is usually the better option if you plan to be somewhere more than a few years. However, the financial landscape has changed in recent years, with changes in the housing stock and home lending shaking that up. It’s worth taking another deeper look into whether renting or buying makes the most sense for you.
In this blog, we’ll discuss initial costs, the long-term implications of building equity, and other factors to help you select the housing option that best suits your needs and wants!
Should I Rent or Buy?
When deciding between renting and buying a home, you’ll balance multiple factors involving your specific financial circumstances, lifestyle preferences, and the housing market dynamics in your area (or any you would consider living in).
Your Financial Situation
Your financial situation and stability is a key factor in the decision to rent or buy, because a homes is one of the most expensive purchases a person can make in their lifetimes. You should consider how much money you make, how stable that income is, and any potential future income growth based on your industry, education, and level of expertise.
Realistically, a steady and reliable income stream suggests greater suitability for homeownership, because consistent income offers a better likelihood that you’ll be able to meet your mortgage and property tax obligations. If your income is unpredictable, it can be hard to qualify or feel confident taking out a mortgage loan.
Another element of the financial situation is your savings to go toward the up-front costs of purchasing a home. We’ll dig into the details next, but you’ll need to have enough saved for a down payment, closing costs, and of course, an emergency fund. If you have sufficient savings, homeownership may be more feasible for you, if that’s what you want – or it could allow you to enjoy some of the perks of renting, which we’ll cover soon!
The Local Real Estate Market
The home buying process is very much impacted by the supply and demand in an area. Buying a home is not like other types of purchases where you can simply walk into a store, browse stocked shelves, pick what you like, and check out all in a few minutes (wouldn’t that be nice if it was, though?). Some real estate markets move lightning fast with tight inventory, while others will have lots of options at your price point. If you have your heart set on a certain area, assess the rental and for-sale housing inventory. That can help you narrow down whether renting or buying is more realistic at this point in time.
If you’re open to multiple different areas to live, research those and filter by your price point (either monthly rent or overall purchase price) to get an idea of what type of housing is available.
Your Lifestyle
Of course, money isn’t everything. Money is a tool to support your lifestyle, so consider your lifestyle needs and wants in your home hunt. You may value being close to family or friends, job opportunities, schools, or recreation options. You may want the hustle and bustle of living in the heart of the city or maybe you prefer living out in the country where you can be one with nature. You may delight in tinkering around your home, or maybe happier to have someone else take care of maintenance for you.
Homeownership offers stability and the freedom to customize your living space; renovate your kitchen into the 1950s retro style or build a rock-climbing wall in your basement – it’s up to you! It’s also ideal if you seek long-term roots in a community. In contrast, renting provides flexibility, making it a great option if you’re still establishing yourself or if you may have location or lifestyle changes in your future.
Costs of Renting and Buying a Home
As we covered above, your financial situation has a big impact on whether you should rent or buy. Let’s dig into the costs of both so you have the details you need to see which option makes most sense for you.
Initial Costs of Renting
When you rent, the initial costs are much lower than buying. The initial costs of a new rental typically include the security deposit, first month’s rent, and possibly broker’s fees in some markets. If you opt to rent from a larger property management company, you may be able to get a lower security deposit (in the realm of a few hundred dollars) compared to renting from a mom-and-pop landlord because these companies operate at scale, allowing them to spread expenditures across numerous properties. If you’re moving to a new area, it’s often easier and a lot less money out-of-pocket to rent in a large complex than trying to find a single-family home for rent.
Ongoing Costs of Renting
After moving in and getting settled, you’ll adjust to the ongoing costs. These include the monthly rent, amenities or pet fees (if applicable), and renter’s insurance. Renter’s insurance provides protection for personal belongings and liability coverage, with costs as low as $10 per month.
While these costs typically remain stable throughout the lease period, it’s important to note that the monthly rent may increase at the end of each lease term. Zillow reports that from 2016 to early 2024, nationally, year-over-year rents increased from a low of 1.5% in September 2020 to a peak of 16.1% in February 2022. Depending on any rent stabilization laws in the area or areas you’re considering living, you could face a steep increase in rent upon lease renewal time, leaving you to choose between absorbing the rent increase or moving to a more affordable rental.
However, when you rent, you won’t suddenly have to fork over the cash to replace a big- ticket item like an appliance, nor have to save in advance for big projects like replacing a roof. You can budget predictably at least until the end of your lease.
One final note on the cost of renting: when you rent your home from someone else, they can make decisions about their property that impact you. If you rent from a private landlord, they may choose to sell the property which can force you to move or re-negotiate with the new owners. The property owner may put the property under new management which may come with new policies or increased fees even midway through your lease. Plus, some property owners may not maintain their properties as well as they should – we’ve all heard landlord horror stories – which can mean you’re picking up the slack and/or bill to make your home more comfortable.
Ultimately, this may mean that you find yourself moving (and dealing with the time and costs associated) sooner than you thought. When you rent, it’s important to know your rights as a tenant but also be prepared for things to change.
Initial Costs of Buying
In contrast to renting, buying typically has a much larger up-front cost.
Firstly, it’s well known that for many potential home buyers, the down payment is one of the most significant expenses. How much are home shoppers putting down? Realtor.com reported that the median down payment reached a new peak in July 2023 with a median of $30,000 and an average percentage of 14.7% of the down payment. However, ATTOM Data Solutions reports that as of Q3 2023, the top 10 metros in the United States have median down payments between 21.5% – 26.2%. Ultimately, it varies a lot by location. You can get a pulse on what’s happening in your area by speaking with a real estate agent. That can help you set your expectations before you start browsing!
There are home loans with much lower down payments required – from 0% to 3.5% – such as Veterans Affairs loans, Federal Housing Authority Loans, and Physician Loans. Look into those to see if you qualify. That can help make homeownership a reality sooner by lowering the savings hurdle required.
Additionally, closing costs, which include fees for services such as title insurance, appraisal, real estate commission and attorney fees, are another important line item to account for. Rocket Mortgage reports closing costs are typically 3-6% of the home’s purchase price.
One thing first-time home buyers may not know: property taxes are also often due up-front at closing, adding on another chunk of cash to fork over.
Two other fees to be aware of are inspection fees (for assessing the home’s condition and identifying any repairs needed) and loan origination fees (charged by lenders for processing the mortgage application).
Beyond those mandatory costs, after you buy a home, you might find yourself facing additional expenses for repairs or optional renovations before moving in. These could range from minor repairs to major overhauls, depending on the home’s condition and your preferences. If you plan to buy a home, unless you’re shopping for exclusively move-in ready properties or new construction, there’s likely some kind of work that makes sense to do. Even if it’s just paint and flooring before you move your furniture in, it all adds up!
Ongoing Costs of Home Ownership
Owning a home has several line items that make up the ongoing cost. These are the key expenses to consider:
- Mortgage principal
- Mortgage loan interest
- Private mortgage insurance
- State and local property taxes
- Homeowner’s insurance
- Home maintenance
The total cost for these line items will depend on the home you buy, your financing terms, and your local area, so it’s hard to give an accurate number about what to expect. As a starting point, Forbes reported as of October 2023, homeowners typically can expect an annual cost of $14,155 (or $1,180 a month) in “hidden costs” like utilities, maintenance, and property taxes. When it comes to home maintenance, CNBC reported that experts recommend budgeting 1% of your home’s value away each year in home maintenance, improvement, and repairs.
However, homeowners can recoup some of these costs. Each mortgage principal payment builds equity. Home improvements can help increase the value of your property, which you can benefit from when selling or renting it out down the line, or if you pass the home on to a family member. Some home improvements qualify for federal income tax credits, such as the Energy Efficient Home Improvement Credit. You can also deduct mortgage interest from your taxes, up to a certain amount. All these factors can lower your total ownership cost over time.
Crunching the Numbers
To determine whether buying or renting makes more sense financially, you’ll need to crunch the numbers and account for both short-term and long-term considerations.
Short-term considerations should include what makes the most sense for you in the near future. Consider your current income and budget, and the best use for any cash you’ve saved. That may look like a down payment, but it could also include paying down debt to reduce your overall cost of debt and improve your debt-to-income ratio before applying for a mortgage loan. Or, it might look like putting it in a high yield savings account and letting the annual percentage yield grow your savings into a more substantial down payment. For some, that cash could be best put toward catching up on retirement savings. Speak with a financial professional for recommendations to identify the best money moves for you!
You’ll also want to balance long-term considerations. If homeownership is something you want at some point in your life, you should formulate a plan, even if it’s not in the near future. You’ll need to consider the impact of equity. Two other important factors are the mortgage rate market and price growth of the types of homes you would want to buy. With the nationwide real estate shortage and home price increases due to demand outweighing supply, you may find it’s more cost-effective in the long run to lock something in sooner rather than later. Granted, so much of that depends on what happens in the future, which no one can predict. Learn more about the state of the 2024 real estate market to find the background information you need before starting a house hunt.
When it comes to the numbers, there’s a great tool to help you make sense of the math. The New York Times has an interactive calculator where you can input information for your situation like the home price, how long you plan to stay, your mortgage rate, the property taxes for a specific property, and the expected maintenance costs of a property. It will crunch the numbers and tell you at what monthly rent price point that renting is more cost-effective. This resource is a great way to get a more personalized recommendation of what would be more likely to serve you better – or a target rent price to aim for while you save up for a home!
The Impact of Building Equity
One of the key reasons why people buy a home is to build equity. But what does that mean, and why is it worth considering?
Equity is the amount of your home that you own, and the value of it – usually the amount of the mortgage principal you have paid back, but also including any adjustments in market value of the property. You can use that equity by selling the home and cashing it out or putting it toward a new property, or borrowing against your house by taking out a home equity line of credit. Equity plays a part in your net worth because your home is an asset.
In the United States, most people build their net worth through owning their residence. The 2022 Survey of Consumer Finances found that the median net worth of homeowners was $396,500 and just $10,410 for renters.
However, you don’t need to own property to build wealth. You can invest in stock on the stock market, own a business, or hold other physical assets like gold. It’s easier than ever to invest with online platforms. Many intentional and financially savvy renters don’t want to tie up their wealth in their property because it can be harder to access, and they want their wealth and their home to be two separate things.
However, the data is still clear – renters continue to have a significantly lower net worth, on average. Even for things like retirement accounts, the Survey of Consumer Finances also found that homeowners are twice as likely as renters to have an account at all (32.7% compared to 65.5%). Why is that? One reason ties into the data from Zillow we showcased earlier: rents will typically go up each year. In contrast, most mortgage payments stay flat with a fixed rate mortgage. With salary increases over time due to inflation or career growth, homeowners often have more disposable income to put toward investments or retirement, while renters’ housing payments can stay proportional to their income. So not only are renters not building equity in a property, but it’s also harder for them to catch up on alternative investments.
Ultimately, whether you choose to rent or it’s your realistic option because you’re unable to buy in the area you want or need to live, it’s worth making a plan to build your net worth since you can’t tap into home equity. Check out our blog on saving for retirement as a great starting point!
Conclusion
Home means a lot to us – it’s our base where we seek comfort, spend time with family and friends, and build community. Though it’s a meaningful and significant choice to choose to buy a home, the decision-making process also includes plenty of practical considerations. Now, you’re informed with what factors to consider when deciding if renting or homeownership is right for you at this stage in your life. You can browse those listings with confidence! Remember: if things change in your life and you are looking to move, you can always reevaluate if renting or buying makes sense, then adjust accordingly!
If you’re looking for a place to save up for a house down payment, home upgrades, or a fund for home maintenance, check out Milli! Our Jars make it easy to save up for specific goals and automate your saving. You’ll also get a competitive annual percentage yield to grow your savings faster. At Milli, we’re all about helping you save for the things that matter most. Download the Milli app on the App Store or Google Play and sign up to start working toward your financial goals today!
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