Updated: Mar 28, 2022
It can be very stressful when trying to decide whether buying or renting is the right option for you. Each option has its fair share of pros and cons. The intent of this article is to simply educate and help kickstart your decision making process. Hopefully by the end of reading this you will have a better understanding of the pros and cons of each option.
Most people when asking themselves the question “should I buy or rent?” only think about the mortgage payment. This is a big mistake. The mortgage payment is only part of the equation when you own a home. Other expenses include taxes, insurance, as well as other fees such as trash, utilities, and maintenance. Your expenses can add up very quickly especially if you find out something is wrong with your home. For example, when you own a home and something goes wrong such as a leaking roof or pipe, you are the one that is going to be responsible for fixing the issue. Whereas when you are renting the landlord or property management company takes care of necessary repairs. You will also have to pay for little expenses such as cutting your grass or snow removal as well as landscaping expenses such as mulching and trimming shrubs and bushes. You’re either going to have to pay someone to do it or you will have to buy the tools to do it yourself such as a lawnmower, snow blower, hedge trimmer, rake, etc.
Another expense that you will have to pay for is furnishing your entire home. Typically when you are renting there is less space that you need to occupy/furnish whereas when you own a home you will likely have more square footage that you will need to cover. According to a home furnishing company, based on a 3 bedroom home, the average price it costs to furnish the entire place can range anywhere from $29,000 to $61,000. Keep in mind that's over the course of a few months or years and considering you don’t already have some things. Regardless, that's still a large chunk of change!
When buying a home you will also need to remember you’ll need to have cash on hand for a down payment, earnest money deposit, inspections if elected, appraisal, as well as other closing costs. However depending on the loan you qualify for, these costs can be minimized tremendously.
Breakdown of these costs:
Down payment: can range from $0 down with a USDA loan to 5% with a conventional loan - can be more if you choose
Earnest money deposit (EMD): typically 1-3% of purchase price but can be more if you want the seller to know you’re serious
Inspections: typically between $400-$500 but could be slightly more/less depending on size of the home and the inspections chosen
Appraisal: typically around $500 but can be more/less depending on circumstances
Closing costs: typically between 3-5% of purchase price but can be more or less depending on the loan or seller assistance
Although these costs can all look very intimidating at first, it is important to think about it as an investment. For example, when you put your money down on a home, you are not losing that money. You are investing that money into your home. Or in other words, you now own equity in your home. To show this, let's use the example of a 20% down payment on a home. We’ll say the home you are purchasing is a $200,000 home so you had to put $40,000 down. When you put this money down, it is not just disappearing. That 40k that you put down is now invested into your home. You can still get this money back when you decide to sell your home. A good analogy is to look at your home like a bank. You just put $40,000 into your savings account and with each mortgage payment, you are adding more and more money to your savings account each month. Doesn’t sound so bad anymore does it? Not to mention you can use the equity from your home as a line of credit!
If you feel like you are not ready for homeownership quite yet, then renting for a year or two is still a great option. Renting is great because you don’t have nearly as many responsibilities as you do if you own a home. For example, not having to pay for basic maintenance and landscaping. If something breaks, usually the landlord or property management company will take care of it. You don’t have to worry about property taxes or home insurance. Typically with a rental you only have to worry about your monthly payments and then maybe a few utilities here and there. An added bonus to renting is that it also gives you the freedom to move around depending on the length of your lease.
People are often scared to rent because they believe they are just throwing their money away each month instead of building equity in a home. Although they might not be building equity by renting, they are still taking an important step towards home ownership. For example, when you rent you have a scheduled monthly payment (which is good practice for when you have a mortgage payment every month). Also, even though you are renting you still need to pay for groceries, furniture, and usually some utilities just like you would if you owned a home. This forces you to be responsible and stick to a budget. Bonus! Your lender might be able to use your rent payment to help you get a home loan in the future!
Overview of pros and cons:
Freedom to move around
Usually don’t have to pay for maintenance costs
No lump sum closing costs
You aren’t building equity
It’s not “your” home so you are limited to the things you can do to it such as painting
Depending on the lease, the landlord could decide he/she doesn’t want to rent anymore and you would have to find somewhere else to live
You are building equity for your future
Home could increase in value
It’s yours, you can customize it however you want!
Will likely have to pay for closing costs and other fees during the buying process
You are responsible for all utilities and maintenance
Less flexibility as far as moving around
Both buying and renting have their fair share of pros and cons. Renting is great for the short term (few years) but I wouldn’t recommend it for anyone who can afford to buy and plans on staying in the area for at least 3 years. After all, owning a home is still the American dream and I encourage everyone to do so!