Renting vs. buying: Making the jump to homeownership (2024)

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• While buying a house can set you up for financial success, renting comes with its own benefits, like flexibility.
• Think about whether it's the right time in your life to buy, especially considering mortgage rates and home prices.
• If you can't afford a down payment or monthly payments, you may want to continue renting for now.

Buying a home can be a great way to build long-term wealth. But the idea that renting is a waste of money is a myth. In fact, sometimes it can be the better choice.

There's no clear right or wrong answer about whether you should buy or rent. The best fit depends on your finances, lifestyle, and several other factors.

What are the pros and cons of buying vs. renting?

The pros and cons of renting are often the inverse of those for buying. On the plus side, a landlord takes care of repairs, and you have the flexibility to move more easily. However, you have to abide by the landlord's prices and rules, and you don't get the financial benefits of building equity or deducting taxes.

Here are the pros and cons of buying a house instead of continuing to rent:

Pros of buying

• Build equity. As you pay down your mortgage and the home value increases, you'll gain equity in the house. You can borrow against the equity to finance other big goals. You could also sell the house later, then keep the money or use the profit for a down payment on your next home.
• Tax benefits. As a homeowner, you're eligible for tax deductions on paid interest, property taxes, and home improvements when you file taxes each year.
• Customize your home. Your landlord won't always approve changes when you rent. But you have the power to update the home when you're the owner. (Just make sure any big changes are approved by your homeowner's association, if necessary.)

Cons of buying

• Monthly payments could change. "Property taxes can change depending on the market and a lot of other factors that are out of your control," says Robert Heck, vice president of mortgage at Morty. While your principal and interest payments should stay the same if you have a fixed-rate mortgage, other costs will probably rise.
• Maintenance. Your landlord takes care of home repairs when you rent. Once you buy a home, you're responsible for the time and money that go into maintenance.
• Less flexibility. It's harder to pick up and move when you own a home than when you rent. You have to list and sell the home, hire a real estate agent, and pay closing costs if you buy a new place.
• Home value could decrease. "There are situations in which we do see a downturn or a softening of home prices," says Heck. By the time you move, there's no guarantee that your home value would increase as much as you expect, which could affect your finances later.

Read Insider's guide to the best mortgage lenders for first-time buyers>>

Is it a good time to buy a house?

It's crucial to consider if the timing is right to buy. This doesn't just refer to whether it's a good time in the real estate market. You should also ask yourself whether it's the right time in your life to buy.

Inventory

Low inventory is a chronic problem in the real estate market. According to recent research from Realtor.com, in 2022 there was a 6.5 million home gap between the number of single-family homes being constructed and household formations.

"It's not going to be a quick fix," says Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors.

It can be especially difficult to find homes at an accessible price for new buyers. A 2021 analysis by Freddie Mac found that the lack of entry level homes, or starter homes, is even more severe than the overall inventory shortage.

The lack of housing drives a competitive landscape. While competition has calmed down somewhat this year, buyers often still have to make multiple offers on homes before they get one accepted.

Additionally, a lack of housing may force compromise for prospective buyers. Mark Stapp, a real estate professor at Arizona State University, warns against having "unrealistic expectations." He says buyers need to understand the limits of their budget and "be willing to make trade-offs in size, price, location, or amenities."

Low inventory can make it more difficult to buy a home, but it doesn't necessarily mean you shouldn't buy. Just know that wish lists might have to be negotiated when there aren't enough properties to begin with.

Prices

Housing prices continue to rise at a faster pace than income. At the start of 2023, the median sales price in the US was $436,800, according to data from the US Census Bureau and the US Department of Housing and Urban Development.

New York real estate agent Lauren Hurwitz advises clients to think about how long they plan to stay in a home. If buyers are looking during an especially robust time, the length of their investment matters.

"If you're buying for 30 years, it doesn't really matter as much," Hurwitz, a broker with Compass, says. "If you're buying for five to seven years … I cannot guarantee you that you're going to get all that money back."

When creating a budget, Stapp says not to set an upper limit that's too high. Buyers might want to stretch to reach their highest possible price, he cautions, but an unexpected jump in costs, like gas or food prices, might put stress on their monthly budgets.

"You've got to make sure you have enough buffer to absorb some of these shocks," he says.

Interest rates

The interest rate you lock in for a mortgage will greatly determine your monthly payments. Mortgage rates are affected by a wide range of factors, including the overall economy and the short-term interest rates set by the Federal Reserve.

Buyers can't control macroeconomic forces, but can still tip the scales in their favor.

"It feels trite to say 'shop around,' but most people don't do it," says Benjamin Keys, professor of real estate at the University of Pennsylvania.

A 30-year fixed mortgage isn't just some "plain vanilla contract," Keys says. Instead, there are variations across mortgage lenders in the rate and origination fees they'll offer you.

"It sounds like really lame advice but can actually save thousands of dollars over the life of the loan," Keys says.

It can even help to treat it just like a salary negotiation, informing banks what rates you were able to find elsewhere.

"Make the banks compete with one another. They'll be very clear when they can't," says Keys.

Timeline

Market factors can fluctuate, but experts stress that the decision of when to buy is ultimately personal. The most important question any individual should consider is: "How long do I plan to live here?"

"Renting provides some of that flexibility in life," says Stapp. Living in a rental allows people to make quicker changes to their lifestyle or to move for better job opportunities.

Such rapid changes can make the costs of homeownership burdensome in the short term. Selling a house is a longer process and includes many more costs such as transfer taxes, realtor fees, title insurance, and origination fees on a mortgage.

A family's size and its potential to grow is another factor to consider. "If you're going to have very different needs as the family grows, then owning for a really short period of time can be very costly," Keys says.

Homeownership also costs more than just the monthly mortgage payment. Repairs and upgrades can dig into an individual's savings.

Keys says buyers need to be prepared for maintenance issues that are "potentially very costly, and are going to vary quite a bit, depending on the age of the house and how well the house has been maintained."

Fixing a roof, for example, might be a steep cost if you're selling a home in the short term.

Can I afford to buy a house?

When deciding whether you can afford to buy a house, you should look at two aspects: the upfront costs and monthly payments.

Upfront costs

The most obvious upfront expense is the down payment. You can often get a conventional mortgage with as little as 3% down.

You should also factor closing costs into your upfront expenses. This could include an appraisal, an underwriting fee, a mortgage origination fee, and even a certain amount of property taxes paid at closing.

Finally, ask yourself how much you want to have left in savings after closing. By completely draining your savings to buy a house, you put yourself at risk in case of an emergency.

Monthly payments

To determine how much you can afford to pay monthly, a good strategy is to follow the 28/36 rule.

The 28/36 rule refers to how much debt you can take on to still qualify for a conforming mortgage. According to the rule, you should spend 28% or less of your gross monthly income (which is the amount you earn before paying taxes) on housing. This includes your mortgage, property taxes, mortgage insurance, homeowners insurance, and HOA fees, but not costs like utility bills.

The rule also states that you should spend a maximum of 36% of your gross monthly income on all debts, such as your mortgage, car loan payments, and student loan debt.

Many mortgage lenders follow the 28/36 rule when deciding how much to approve you to borrow. Every lender is different, though, so you may qualify even if you have more debt. Regardless, it's important to consider how much you can pay each month and still live comfortably.

If monthly mortgage payments would be a financial strain, it could be better to keep renting for now.

Renting vs. buying frequently asked questions