Explore your mortgage options
Owning a home is a significant goal for many Americans. The New York Times reported this year that nearly three-quarters of Americans consider homeownership a high measure of achievement – a higher percentage than graduating from college, building a career or raising a family. The survey also noted that renters often cite affordability and other financial obstacles as reasons for delaying their first home purchase.
Identifying the right timing and assessing your readiness are crucial if you want to take the home-owning plunge. Evaluating these and many other variables are crucial before you jump into the market.
Is Buying Cheaper Than Renting a House?
The short answer is that both options are becoming more expensive. The question about what makes more sense can depend on where you live (or if you are able and willing to relocate) and some other specifics about your circumstances. Here are some general trends to consider.
Housing prices continue to increase almost everywhere
There are numerous ways to analyze housing price trends in the United States. One of the most respected price reports is the Case-Shiller U.S. National Home Price Index. It provides details about the costs of single-family homes on a national level as well as for individual market areas.
The national index has more than doubled between 2013 and 2022, reflecting tremendous increases in the overall cost of existing homes. The median sales price across the country increased from $240,000 to $440,000 during that time.Of course, in some regions, $440,000 would still look like a tremendous bargain for a single-family home.
Rents are also climbing
As interest rates for mortgages and other loans increase, some potential buyers can’t afford to buy. Frustrated would-be homeowners stay in the rental market, driving rental rates higher. But rents are already skyrocketing, increasing across the country since last year by an average of 10%, and by more than 25% in high-demand markets.
The rental housing imbalance of supply and demand has been exacerbated by pandemic-related shortages of building materials, which has slowed down the production of new homes for both purchase and rental.
The impact varies by region, and the price isn’t the only factor to consider when deciding whether to invest in a home.
How Do You Decide if You Should Rent or Buy a House?
Sometimes the decision to buy will be influenced by external factors like marriage, adding to the family size or frustration with the lack of control inherent in renting. Alternately, some focus on the goal, awaiting the moment when it feels right to jump in.
Here are some questions to ask yourself before you start touring open houses:
What’s your financial situation?
It’s a good idea to conduct a thorough assessment of your financial health before you decide to invest in a home. This will help you decide if you’re ready and assist you in setting a budget for the purchase.
Consider these key elements to determine your financial readiness:
Credit score: Regularly review your scores offered by the major credit bureaus and check your credit report for accuracy. While a good credit score (of at least 620) is a big help, you may be able to buy with a lower score. (Find out more about what affects credit scores.)
Debt-to-income ratio: Lenders look at your debt compared to your income. There are two formulas that matter. The first is called front-end, which measures how much of your income is needed to pay the anticipated expense of mortgage principal, interest and taxes and, in general, should be less than 28%. The back-end ratio measures all your debt combined compared to your income – 36% is okay for this ratio. We have a handy tool you can use to calculate your debt-to-income ratio.
Down payment: Luckily, the days of a 20% down payment are history, but you still need to have some money saved up, at least 3%. In many cases, you can use gift funds for this purpose, but be prepared to show where you got the money from.
Emergency fund: Do you have money set aside for emergencies, in addition to a down payment? Lenders want to know that a significant repair or a job loss isn’t going to derail your mortgage payments. Plus, homeownership comes with expenses that renting doesn’t have – like plumbing repairs.
One great way to figure out if you can afford a home (and how much you can manage) is to model some scenarios using our mortgage calculator.
Are you ready to be a homeowner?
Keep in mind that being a homeowner isn’t just about money. For busy people with hectic travel and work schedules, being responsible for a house may not make sense. Consider your lifestyle before you commit.
Also, for long-term renters, not having a landlord to call when something needs fixing can be a challenging adjustment. When a drain backup turns into a huge sewer blockage, the repair is managed and paid for by the homeowner, your landlord. You might have a little inconvenience, but no significant disruption.
In contrast, unless you are handy, you as the homeowner are the responsible party, needing to find a plumber, take time to meet and qualify the one you choose, be present for the work and then pay the cost of needed repairs.
No matter how old or new the house you buy, things need fixing, replacing and upgrading. You will be responsible for both the repairing and maintaining of both the indoor and outdoor features (landscaping, fencing and the garage) of your home.
Where do you live?
While the cost of owning is increasing across the country, some regions are just more expensive than others. It’s not just the cost of the house itself; there are also taxes and insurance expenses to consider. Rent prices don’t always track closely with purchase prices, so the calculation depends on where you live.
The National Association of Realtors reports that it’s less costly to rent an apartment than to buy a home in every major U.S. city when you consider the total cost, including mortgage payment, property taxes, maintenance and insurance. And when they compared the cost of renting a house to owning one, they found that it was still more expensive in 56% of the 178 major metropolitan areas reviewed.
If you live in one of the high-cost areas but are willing to relocate to a more favorable one, you can probably save quite a bit by being flexible. Some sunbelt cities (outside of California) offer reasonable values. Use our cost of living calculator to compare possible target cities.
How long do you plan to live there?
Another factor to consider when you are deciding whether to buy a home is your plans for your future. If you are settled in the area you plan to call home for a while, that’s a check in the “pro” column for buying.
While some homeowners sell and move frequently, it’s definitely simpler as a renter. If you see yourself following your career or other aspirations to other locations, you might want to wait. Even if you’re thinking of a big career change or adding to your education, maybe right now isn’t the right time.
Changes in family size might be a factor to consider. Will a two-bedroom house be big enough in 3 – 4 years or could there be potential additions to your family? Owning a house as part of a longer-term plan allows you to recoup the investment of closing costs and any upgrades, plus benefit from increasing equity. Also, while real estate values often increase, you can’t count on being able to sell for what you want to get when you want to get it. Real estate isn’t always liquid.
What Are the Pros and Cons of Buying a House?
Is it worth it to buy a house? The answer depends on your situation and preferences. Buying a house can be a great way to enhance your financial security and stability. As you make payments, you build equity, which gives you a financial asset to leverage. Still, the payments you make in the first years mostly go toward interest, not increasing your equity.
Property usually increases in value, which means your stake in the house is worth more than you paid. This is one way to gain a profit when you sell or leverage the asset to invest in other properties.
For many homeowners, the most important part about buying a home is knowing they hold the keys. You won’t have to worry about rent increases or a landlord selling the property.
Forget asking permission to paint the bathroom blue. When you own the home, you can truly make it your own, from changing colors to adding a pool and creating an urban jungle in the yard.
Ownership has tax benefits, which can help with the cost. Mortgage interest is often tax deductible, as are property taxes. This advantage was limited, however, by the caps put in place by the Tax Cuts and Jobs Act in 2017.
Your first house can become a big investment. When you decide to move, keep the first house and rent it out. Or consider the income potential of short-term rentals using a platform like Airbnb.
Buying a home requires saving a down payment, creating an emergency fund, and paying other costs like taxes and insurance.
Owning a home means you pay for repairs and maintenance instead of calling the landlord for help.
Selling a house can take a while, and there’s no guarantee that you will get the price you want. In the meantime, you still have to pay the mortgage and other holding costs.
What Are the Pros and Cons of Renting?
Renting gives you greater freedom to move when you want to, whether that means across the street or across the country. If you decide to go back to school or need to reduce your expenses for any reason, it’s a lot easier when you don’t have a mortgage.
For free spirits, renting is ideal – you can move to a new home for almost any reason. If you suddenly decide you want roommates, get a bigger place. If you decide you need to live alone, a smaller place might be better. It’s all up to you.
There is great peace of mind knowing that a leaky roof isn’t going to ruin your budget or wipe out your “rainy day fund.” Calling the landlord for repairs is usually financially painless.
Writing that check (or making that electronic transfer) for rent every month really is paying someone else’s mortgage and building their equity. No matter how much rent you pay, you aren’t creating an ownership stake.
When you rent a home, you’re subject to someone else’s décor preferences. If the landlord limits you to white paint and no nails, you must abide by their wishes. You can’t turn the kitchen nook into a loft or dramatically change the landscape without permission.
In most areas, you can’t predict what the rent will cost next year. Sometimes it may not increase but, when demand is high, it might rise substantially. That can be nerve-wracking.
You can’t assume you will be able to stay, even if you pay your rent as agreed. Landlords in most regions can ask you to leave for various reasons (such as wanting to rent to a relative or perform renovations). Also, you’ll have to move if the landlord decides to sell to someone who doesn’t intend to rent the property.
There’s No Place Like Home
Whether you rent or buy, home is what you make it. For many people, buying a home is a critical milestone and a building block in their financial plan. For others, the importance is symbolic but no less powerful. Yet some savvy investors prefer other options for their portfolios, keeping housing expenses to a minimum through renting. Whether you buy a house and when depends on your priorities and financial choices.
Take the first step toward buying a home.
Get approved. See what you qualify for. Start house hunting.
The Short Version
- Is buying cheaper than renting a house? The short answer is that both options are becoming more expensive
- Keep in mind that being a homeowner isn’t just about money. For long-term renters, not having a landlord to call when something needs fixing can be a challenging adjustment
- Buying a house can be a great way to enhance your financial security and stability. As you make payments, you build equity, which gives you a financial asset to leverage
New York Times. “Homeownership Remains the American Dream, Despite Challenges” June 2, 2022. Retrieved August 2022 from https://www.nytimes.com/2022/06/02/realestate/homeownership-affordability-survey.html
Federal Reserve Bank of St. Louis. “Federal Reserve Bank of St. Louis. S&P/Case-Shiller U.S. National Home Price Index.” Retrieved August 2022 from https://fred.stlouisfed.org/categories/32261
Washington Post. “Rents are rising everywhere. See how much prices are up in your area.” Retrieved August 2022 from https://www.washingtonpost.com/business/interactive/2022/rising-rent-prices/
National Association of Realtors. “Mortgage Payment-to-Rent Ratios Show East-West Divide Between Owning and Renting” Retrieved in August 2022 from https://www.nar.realtor/blogs/economists-outlook/mortgage-payment-to-rent-ratios-show-east-west-divide-between-owning-and-renting
Cornell Law School. Legal Information Institute. “Tax Cuts and Jobs Act of 2017 (TCJA).” Retrieved August 2022 from https://www.law.cornell.edu/wex/tax_cuts_and_jobs_act_of_2017_%28tcja%29