Is it cheaper to rent or own a house? With more and more people choosing to become long term renters, this may be perceived as the cheaper option. But in fact, there are pros and cons to both renting and buying. We explore the different costs of rent vs buy if buying a home is a good investment and how you can choose which option is right for you.
Rent vs Buy: Calculating the costs
Renting
Renting doesn’t require as much upfront financial investment as buying a house. In saying that, if you live in an expensive city, your monthly rent may be much higher than a monthly mortgage payment.
To secure a rental you typically need one month’s security deposit, and one or two month’s rent. Rent may or may not include utilities, such as power, gas, water, internet or cable.
Buying a house
A down payment of at least 20% is ideal when buying a house. However, many people have much less than this, sometimes as low as 3%. A lower down payment can provide a way to get a foot on the housing ladder, as long as you can afford the monthly mortgage payment.
Be aware that paying less than 20% for your down payment could mean you need to purchase private mortgage insurance (PMI), which will drive up your monthly payment too.
As a buyer, you also need to be prepared for the hidden expenses, such as:
- Home inspection fees
- Quotes for repairs needed from contractors
- At least 1% of the sales price for earnest money
Homeowners also pay ongoing costs, such as appliance repairs, property taxes, homeowners association fees, and general maintenance. Renters usually deflect these costs to their landlord.
Is Buying a Home a Good Investment?
One of the key differences between rent vs buy is that owning a home builds equity. If you buy in a good location and prices go up, you can make money on the property when you sell.
If you rent you will never own the property, and will always be at the mercy of your landlord. They may decide to terminate your tenancy agreement forcing you to search for another place to live. When you own, you are the landlord and no one can force you out, apart from the bank if you don’t make your mortgage payment.
Homeownership can also be a tax advantage as you can deduct the interest on home equity debt of up to $750,000 used to acquire or improve your residence.
Rent vs Buy: Which is Best For Me?
Is buying a home worth it? It depends on your personal situation. Renting gives much greater flexibility than buying. There are many situations where renting can be a better option, such as:
- Moving to a new city
- Unstable job prospects
- Getting divorced
- Getting married
- Planning to have a child
- Downsizing
It can often be better to rent if you’re not sure of your lifestyle or budget right now and want to wait to see how things pan out. Buying a home is a big commitment, so you want to make sure you can afford the home you want and be able to live there for at least five years to build equity. You also need to be sure you can pay for home repairs and maintenance comfortably, or at least build an emergency fund to dip into.
We hope this article gives food for thought on what’s involved in renting vs buying. Weigh up your options carefully and don’t rush into anything before thinking things through or talking over your plans with a trusted friend or advisor.