Should I Rent or Buy My Home – What Makes the Most Financial Sense?
Holly Wanegar, CFP®
Associate Vice President & Wealth Advisor
When it comes to the major life decision of buying vs renting a home, there are important financial and lifestyle factors to consider. Owning a home offers the potential for building equity and stability but comes with upfront costs and less flexibility. Renting provides more freedom to relocate and avoid maintenance expenses but doesn't build equity. Here's a detailed look at the pros and cons of buying vs renting to help you determine the right path.
Advantages of Homeownership
1. Long-Term Investment
It's important to think long-term during the homebuying process. Generally, people are encouraged to purchase a home if you plan on staying there for five years or longer, as this gives your property time to grow in value. Plan on maintaining or improving the condition of your property, as this is what makes for a good long-term investment. Even if the value of your home depreciates over time, it's possible the land could become more valuable.
2. Building Equity
Equity is the difference in the value of your home and what you still owe on it. Every time you put a payment toward your mortgage, your home equity grows. Equity is important to have, as it can help you build wealth over time.
3. Stability & Consistency
Obtaining a fixed-rate mortgage means that you will pay the same amount each month for interest and principal until the mortgage has been paid off. Conversely, rent can increase with every lease renewal or move. Having a stable mortgage payment can help you avoid increases in your housing expenses.
4. Customization
Since you own the property, you can renovate it however you want. Renters do not enjoy this benefit, meaning any landscaping or home alterations wouldn't be up to them. Being able to renovate and update your home gives you the potential to increase its property value and overall satisfaction while living in your home.
Disadvantages to Homeownership
1. Upfront Costs
Closing costs on a mortgage generally run between two percent and five percent of the purchase price. Depending on the price of the home, this can be a significant amount of money. Some closing costs include property taxes, mortgage insurance (if less than a 20 percent down payment is made), home inspection, first-year insurance premiums, title search, and title insurance. While a downpayment is important, it's not the only cash you'll need upfront in order to purchase a home. If you're purchasing a $300,000 home, closing costs could easily range between $6,000 and $15,000.
2. Less Flexibility
If you have a job that requires you to move often, going through the process of homebuying may not make financial sense. It can take weeks or months to buy and sell a home. If you must relocate quickly, this can mean paying multiple mortgages as you work to sell your home.
3. Maintenance Costs
If something breaks in your home, you are the one that has to pay for the repairs. There is no property manager or landlord involved when you own your own home.
4. Property Values Can Fall
If you do not maintain your home - or if the housing market takes a downturn - your property value may fall. There is no guarantee that your home's value will increase. There are a number of factors both in your control and outside of it that could affect this.
5. Home Costs Lack Liquidity
While houses do have value, they usually do not sell as quickly as stocks or other assets. Even if you are in the process of trying to sell your home, you still have to maintain your home and make mortgage payments.
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Advantages of Renting a Home
1. Costs May Be Lower
Depending on your living needs and current financial situation, it may be more cost-effective to rent a room in a shared home or a modestly sized apartment. You may also find rentals already furnished, meaning they already include furniture.
2: You Aren’t Responsible for Repairs
If you are maintaining a budget, then you won't need to factor in-home repairs, as that is paid for by the property owner or landlord.
3. Flexibility
Relocation for something such as a job change can be much more difficult with a mortgage. If you do not sell your house as quickly as you would like, you will be paying a mortgage at your old home plus the new one. With rentals, you have the freedom to leave once your lease is up, or your landlord may allow you to find someone to take over your lease for you.
4. Lower Upfront Costs
In order to secure a rental, you'll likely be asked to put down a security deposit. This is usually equivalent to first month's rent or several months' worth of rent. Unlike obtaining a mortgage, you don't have closing costs and you may avoid other fees like HOA dues, painting supplies or other renovation costs.
Disadvantages of Renting
1. No Renovations or Alterations
Even if you would like to make updates or additions to the rental property, you are not able to since you don't own it. Some landlords may allow you to paint or make minor adjustments, but these would need to be approved beforehand.
2. Rent May Increase
If you have been budgeting and factoring in a certain amount of rent each month, this amount may change when it's time to renew your lease. Landlords have the right to increase your rent when it's time to renew your lease, although you may be able to renegotiate the terms.
3. It Won’t Improve Your Credit Score
Paying your mortgage on time every month can be an effective way to improve or maintain your credit score. However, paying your rent on time each month is important but won't necessarily improve your credit score.
4. Your Home Isn’t Building Value
Because the home you are renting isn't yours, the money you pay in rent isn't working toward building equity.
Buying a home provides the opportunity to build equity and put down roots, but requires substantial upfront costs and a long-term commitment. Renting offers more flexibility and liquidity, but lacks the wealth-building potential of homeownership.
You can consult us here at WHZ for personalized guidance on whether buying vs renting a home is better for you, as part of an overall long-term and strategic financial plan Our Plan Well, Invest Well, Live Well™ process considers your life plans, values, financial situation and more to create a personalized financial path toward achieving your goals. And our people-first culture means we’ll be with you to make updates and course corrections as life changes, helping you to continue along your path to success with Absolute Confidence. Unwavering Partnership. For Life.
Presented by Associate Vice President, Wealth Advisor Holly C. Wanegar, CFP®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. www.whzwealth.com.
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