Should you buy a home or rent one? Many believe one of these decisions is better, but no decision suits everyone. In many situations, renting a home is a better financial decision than buying one. The opposite is true, too. More so, those right and wrong decisions will change over time due to a person’s changing financial health, economic conditions, and lifestyle needs.

How do you decide, then? Consider the following strategies to help you make the best decision in buying vs. renting for your personal goals.

Understanding Home Ownership

In homeownership, a person typically obtains a mortgage to purchase a home. They enter into this loan for a set number of years, typically 15 to 30 years. After they pay off the loan, they own the home free and clear. Ownership comes with more responsibility and ongoing costs.

The Cost of Buying

The cost of buying a home will include numerous factors based on what you buy, where you buy, and the overall goals you have with the property. Some of the costs for buying a home include:

• The purchase price (the amount you will pay the seller to buy the home).
• Interest (calculated on the remaining balance you owe on the loan over time).
• Home inspection requirements.
• Loan application fees.
• Closing fees (typically 2 to 5 percent of the total home purchase cost).
• Home insurance costs.

Also, consider that you may need a down payment to obtain a loan when purchasing a home. Down payments are typically 3 to 20 percent of the total home sale price. However, there are some cases where no down payment is required. Down payments lower your loan amount, but you’ll need these funds upfront. You may also need additional funding at the time of purchase to cover any renovations you need to make to the home.

Benefits of Home Ownership

• Sense of stability and community in ownership of a home.
• Over time, your home builds equity, which you may be able to borrow against as you need to.
• At the end of the loan, you stop having to make monthly payments to the lender, reducing your monthly budget needs.
• You can do what you want with your home, whether making cosmetic changes, allowing someone to move in, or changing the layout, as long as you maintain the community’s standards.

Potential Drawbacks

• In most cases, you’ll need a down payment to obtain a home.
• You must qualify for a mortgage loan, typically requiring a credit check, employment verification, and income qualifications.
• If you live within an HOA, you may have to follow some rules set by the community.
• You’re responsible for everything, including liability risks, maintaining the property, upgrading it, and paying taxes, depending on state laws.
• You may lose money if the home's value drops.

Understanding Renting

Renting a home means that you enter into a lease agreement with a property owner to live in their space for a set amount of time for a set amount typically paid monthly. Renters make those monthly payments indefinitely to remain living there.

The Cost of Renting

The cost of renting is often more than just the monthly rent you pay. Some of the costs you can expect include:

• A security deposit may equal or exceed the monthly rent held in escrow until your lease is over.
• Monthly rent is likely to rise year-to-year as the cost of living increases.
• Utilities related to the property, which the owner does not cover.
• Rental insurance (a requirement in some areas).
• Application fees.

The actual costs to rent a property will differ from one area to the next, as well as the size, style, and location of what you rent. More so, rental costs are likely to rise year-over-year.

Benefits of Renting

• The property owner must maintain most structural aspects of the property, freeing you from those costs.
• You don’t need a large down payment to start.
• You may not have to have the best credit score, though most rental companies will do credit and income verification.
• Flexibility to move easier and faster as you need to.
• More amenities onsite that may be expensive to add to a home on your own.
• You don’t pay property taxes.

Potential Drawbacks

• You don’t stop making payments over time.
• You don’t outright own anything.
• The property owner can access and update the property as desired.
• You may be limited to the type of updates or changes you can make to the property.
• The property owner may decide not to renew your lease, meaning you may have to find a new place to live.

Critical Factors in the Buying vs. Renting Decision

How do you make a decision here? Consider the following:

Do you plan to live in this area long term?
Do you have a good credit score right now that allows you to qualify for a low-interest loan?
Have you saved up a down payment?
Do you want the responsibility of owning your own home?
Do you want the privacy that comes with owning your home?

Takeaway

It’s ultimately a personal decision based on financial conditions and goals whether renting or buying is the best choice.
For most people, considering the benefits and drawbacks of each and how well they fit their life goals and needs is the most critical factor.
Both buying and renting involve costs, including those maintained long-term.