Thursday, September 1, 2022 / by Ana Baldner
Is buying cheaper than renting? This depends mostly on the local market and its conditions. The Real Estate market has been heating up the past couple years and many Americans are making the transition from tenant to homeowner.
With rents skyrocketing all over the country, some may make the assumption that even in a heated market, buying may be the better option. But the truth is, there are different associated costs that create key Pro's and Con's to either choice.
Costs of buying
The biggest upfront cost of buying is your down payment. Typically between 3-20% of the home's purchase price. If you do put less down, your interest rate will typically increase, making your monthly payments increase as well. There are many monthly costs you will face, your mortgage payment being the biggest, including principal and interest for your loan. This number could also go up or down if you have a variable interest rate. HOA dues should also be factored in, generally covering landscaping, exterior maintenance and community amenities.
Hidden expenses like maintenance and repairs also pop up with homeownership. Paying for a home inspection and quotes for repairs can sneak up on some buyers. Make sure you have the extra funds needed for these processes.
Costs of renting
With renting, your upfront cost comes in the form of a security deposit and first and last month's rent. You'll also want to be aware of what is included in monthly rent. Utilities, water, electric, gas and internet are all extra costs that will add up if not included in your monthly rent payment.
Buying a home is a big investment. Being able to capitalize on the equity of your home is a huge plus to home buying (the home's current value minus what is still owed). As the value of your home goes up, so does the amount you'll earn when you decide to sell in the future.
If you do get a fixed rate mortgage, your monthly payments won’t fluctuate as seen with current rising rents. This makes homebuying much more affordable for some areas.
This being said, a home purchase is a big decision and equity isn’t accumulated right away. It’s built slowly over time as you make your monthly payments and reduce your mortgage. Selling within the first few years of owning your home won't usually result in the benefit of equity earnings.
It's also important to keep in mind that there is also a lifestyle difference between the two options. Renting offers a form of flexibility that isn't seen when buying a home. Having the option to switch neighborhoods, job locations, states and living locations fairly quickly and easily is a huge plus of renting. When buying a home, it's important to not only look at your current needs, but what your lifestyle will demand of you in the future. Make sure you purchase a home that will fit your needs. If your lifestyle will soon involve getting married, growing a family or downsizing, your home should be able to accommodate these. So if you're not 100% positive on your dedication to a certain area, or might not be able to purchase a home for your changing needs, renting might be the smarter option.
Big questions to ask yourself if considering the transition:
How much can you afford in monthly housing costs?
Are you prepared for a long-term investment?
How long do you plan to stay in the home?
Do you value stability or flexibility more?
What are your financial, career and family goals? (Do you plan to relocate for work? Go back to school? Expand your family?)
Is homeownership in the neighborhood you want to live in affordable, or will you need to relocate?
Overall, choosing between buying and renting is a personal choice that has a lot of factors to take into consideration. Reach out to a real estate agent you trust to help you look at your options.