At some point, most adults will have to make the choice of buying a home vs. renting one. While buying comes with varied and more complicated upfront costs, you get the peace of mind knowing you have a home that’s yours. On the other hand, renting, which has lower upfront costs but more recurring costs gives you the freedom to move around, ideal if you can’t commit to living in a home for more than 5 years.
To help you make this decision, here’s a comparison of the costs of buying vs. renting your home.
Buying and Owning Costs
- Down Payment - Unless you’ve qualified for a zero-down payment loan, you will need to pay a small percentage of the home’s selling price at closing. While your purchase offer has to state your down payment, you can still change this before closing. The amount will vary widely depending on your credit score, local real estate market conditions, and the type of home loan you’re approved for, which can be as low as 3.5 percent (FHA loans) or as high as 20 percent (conventional mortgages).
- Taxes - How much you pay in property taxes will depend on the value of your home and your city or county’s tax rates. Rates also usually change from year to year.
- Loan Payments - Expect to pay monthly loan payments for the life of your mortgage, typically 15 to 30 years. If you have an adjustable-rate mortgage, your payments are tied to a benchmark that can change from time to time. If it’s a fixed-rate mortgage, your payment will stay fixed for the whole loan term.
Renting
- Advance Payment - Your landlord may ask for the first month’s rent in advance, but there are some landlords who will require two months’ rent upfront, don’t hesitate to negotiate.
- Security Deposit - On top of the advance payment, you can expect to pay a security deposit to insure the rental property against damage, repairs, broken leases, and delinquent payments. In most states, the security deposit is usually limited to no more than 1.5x of the monthly rent.
- Monthly Rent - Unless you live in a city or neighborhood with strict renter protection laws, your monthly rent payments may increase every time you sign a new lease. Payments will vary widely depending on market conditions, location, and the size and condition of the rental property.
These are just a few of the costs to consider when thinking about buying or renting a home. Ultimately, your decision boils down to your specific circumstances. If you intend to stay in one place for the next several years, buying a home should be more cost-effective. But if you’re not sure that you can stay put in one area for at least 5 years, renting a house or apartment is probably smarter.
Of course, the first thing you should do is figure out if you can afford the upfront and recurring costs of buying or renting. Talk to mortgage advisor Chris Lamm to learn about your loan options for both renters and homebuyers.