5 Questions to Ask When Deciding Between Renting and Buying

Written By Jeff Hindenach
Last updated December 19, 2017

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December 5, 2016

Simple. Thrifty. Living.

If you ask a real estate professional, “should I rent or buy?” the answer is likely to be “it depends.” It depends on your financial circumstances, how long you intend to stay in your home and your personal preferences. Above all, you need to be well informed about the pros and cons of renting vs. buying and then balance these against your personal situation before you decide.

Renting means greater mobility. If you need to move every few years, it’s easier to end your lease than to sell your home. Unless you have the time to maintain your home, renting is a better option. Finally, there are no guarantees that the current trend of rising home prices will continue.

On the downside, your landlord can raise your rent when you renew your lease. According to a Harvard study, 50 percent of all renters (compared to 38 percent in 2000) now spend 30 percent or more of their income on rent. Also, renters don’t benefit from the mortgage tax deduction that home owners enjoy.

Owning your home means you can build equity. Home prices are rising, with the average home price up by 6.4 percent this year, and you increase your equity with each mortgage payment. Also, as a home owner, you get a mortgage interest tax deduction. Finally, owning your home means you don’t need to get permission to change your home’s exterior or interior.

On the other hand, owning a home means additional costs for maintenance, property taxes and homeowners’ insurance. It also means that if anything goes wrong, it’s your responsibility to fix it. In most cases, it also means a substantial down payment and, of course, you’ll need a credit score high enough to qualify for a mortgage.

Owning a home can also cost a lot more if you have trouble with your credit score. If you rent, your credit score doesn’t effect what you pay each month, but if you buy a home, a lower credit score means a higher interest rate, which can cost you tens of thousands in interest. If you are worried about your credit score before applying for a mortgage, clean up mistakes on your credit report either by yourself (via the credit bureaus) or have one of the many credit repair companies negotiate on your behalf.

Given these pros and cons, here are the five questions you need to ask before you decide if renting or buying is the better fit for you:

  1. How long do you plan to live in your home? It takes time to recover the costs you invest in a home purchase, and it takes time to build equity. For example, on a $150,000 mortgage, your annual mortgage payment will be more than $9,000, but only about $2,000 goes toward principal. By year 10, the principal amount increases to about $3,500. Unless you plan to stay in your home for at least five years, renting is probably a better option.
  2. What are the actual costs of buying vs. renting? If you rent, you’ll need to put down a security deposit and, typically, first and last month’s rent. For a home valued at $150,000, average rent is about $1,350, so figure coming up with three times that amount, or $4,050. If you buy, you’ll need a down payment, which typically ranges from 0 to 20 percent, with an average of 10 percent (or $15,000 on a $150,000 purchase). You also probably have to pay closing costs, usually between 2 and 5 percent of the home’s value.
  3. Where will you be in five years? Although no one can be certain what the future holds, you need to make a prudent judgment about what your life will be like five years from now. If your career is in an industry where success means frequent relocation, your best bet is to rent. If, on the other hand, you need to settle down in one area to raise a family, then buying could be right for you.
  4. Will you qualify for home ownership? Not everyone is able to finance the purchase of a home. In general, you should have a credit score of 620 or higher, and if you want to get the best interest rates, at least 740. Mortgage lenders will also consider your current salary as well as your debt-to-income ratio and total assets before approving your mortgage. If any of these is insufficient, it’s best to rent until your financial situation improves. Check here to see if you qualify for a mortgage.
  5. Is renting or buying better for your quality of life? Although this is a qualitative judgment, you need to consider your personal preferences and determine whether renting or buying is a better choice to give you the things you want. If you want long-term stability and like the idea of living in a home that is yours to change and maintain in any way you like, home ownership is a better choice. If you want flexibility and are not ready for a protracted commitment, you should probably rent.

To make the difficult decision of whether to rent or buy, you need to consider all the factors, as well as your individual needs. Above all, be sure to work with a qualified real estate agent who knows the facts and can take the time to help you carefully weigh these before you sign on the dotted line.

About the Author

Jeff Hindenach

Jeff Hindenach is the co-founder of Simple. Thrifty. Living. He graduated from Bowling Green State University with a Bachelor's Degree in Journalism. He has a long history of financial journalism, with a background writing for newspapers such as the San Jose Mercury News and San Francisco Examiner, as well as writing on personal finance for The Huffington Post, New York Times, Business Insider, CNBC, Newsday and The Street. He believes in giving readers the tools they need to get out of debt.

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