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Deciding whether to buy a home or keep renting is a major decision with important lifestyle and financial implications. Homeownership allows you to build equity, put down roots in a community, and plan around more predictable future housing costs. Renting allows you to explore a different property type or location with each lease and avoid the financial stress of maintenance and repairs.
No matter what your parents or friends say, there is no universally correct answer as to whether it’s better to rent or own your home. It’s up to you to explore each option and choose the one that seems most likely to bring you financial security and a pleasant life.
What’s it like being a homeowner vs. a renter?
Deciding whether to buy a home or continue renting isn’t just a financial decision. It’s also a choice that will impact your lifestyle.
- Stability: If your income is stable, homeownership can give you the opportunity to live in the same place long term, perhaps for the rest of your life. It can also be an ideal choice for someone who wants to develop stronger bonds within their community (or wants that for their kids). (Learn more: Buying your first home)
- Flexibility: Anyone who wants to adapt to changing life circumstances quickly and at minimal cost may prefer renting. If you’re just starting your career or moving to a new area, renting allows you to try out a location without the long-term commitment of buying a home.
- Location: You might prioritize living near your job, among people who share your culture, or in a tranquil setting with plenty of hiking trails. The predominant type of housing in that location might determine whether owning or renting makes more sense. For example, renting in an upscale neighborhood where you can’t afford to buy could mean a more desirable lifestyle, perhaps one where you can walk to stores and restaurants, get the best health care, and meet people who share your aspirations for upward mobility.
- Responsibility: Owning a home means that rusted-out garbage disposals, ant invasions, and malfunctioning air conditioners are your responsibility. Are you comfortable learning the skills to tackle these issues yourself or find reputable professionals who won’t overcharge you? Can your cash flow and savings handle irregular expenses, potentially in the hundreds or thousands of dollars? As a renter, these problems fall on your landlord’s shoulders — but so does the power to execute a desirable solution. If you’ve ever had an irresponsible landlord, you might prefer to be in charge.
- Freedom: As a renter, you may not be able to have a dog, paint the walls, or install a ceiling fan. Any upgrades you attempt will either get you in trouble or benefit your landlord. Homeownership can allow you to put a sauna in the guest room, adopt a ball python, and use your garage as a lapidary workshop. But there can also be misconceptions about the amount of freedom homeownership provides, too.
“Renters may see that homeowners are building equity and can do what they want to a space because they own it,” said Claudia Ferreira, a CFP® professional and a MassMutual financial professional with Blue Ocean Wealth Solutions in East Hills, New York. “However, there are generally rules around what types of improvements or changes are allowed to the exterior of a property, and if it is part of a homeowners association or condo board, then the interior is subject to rules as well.” (See: How to make sure your home improvement pays off)
Local ordinances might prevent you from planting a vegetable garden in your front yard. A utility easement might grant authorized workers unfettered access to your backyard and allow them to cut up your trees. Some communities have covenants, conditions, and restrictions (CCRs) that limit what colors you can paint your house, what style of windows you can install, and how you can use your driveway.
Your homeowners insurance company also has a say. To reduce their risk (and yours), they may not allow you to own certain dog breeds or may restrict the types of shingles you can use on your roof, for example.
Financial considerations for owning vs. renting
The lifestyle considerations of owning a home are irrelevant if you can’t afford it or don’t have financial wellness habits necessary to achieve it.
So first, take a hard look at your career, family situation, spending, and bill-paying practices to see — from a living standpoint — if you’re ready to become a homeowner. (Learn more: Are you ready to buy a home?)
Then, crunch numbers. You’ll want to evaluate whether you have enough savings and income to buy and maintain a home long term.
Here are the savings goals you’ll need to meet to become a successful homeowner:
- Down payment: For every $100,000 you want to borrow, you’ll need $20,000 for a 20 percent down payment, $10,000 for a 10 percent down payment, or $3,000 for a 3 percent down payment. Down payment requirements vary by loan type, and assistance may be available from your state housing finance agency. (Related: Do’s and don’ts of making a down payment on a house)
- Closing costs: Fees to take out a mortgage, get the home appraised and inspected, make sure the home’s title is clear, and officially transfer ownership typically cost 2 percent to 5 percent of the loan amount. Closing costs will be on the higher end if you live in an area with expensive real estate transfer taxes.
- Reserves: Some lenders require you to have at least a couple months’ worth of principal, interest, taxes, and homeowners insurance in savings — after accounting for your down payment and closing costs. It’s a good idea to save well beyond these minimums: You never know when you will lose your job, need an emergency appendectomy, or have your furnace die — perhaps all in the same month. (See: Is borrowing money from your parents a good idea?)
- Worst-case-scenario insurance: If you’ll be taking out a mortgage with a partner, it’s a good idea for each of you to carry at least enough life insurance to pay off the mortgage. No one wants to worry about having to meet a mortgage payment after losing a loved one. Disability income insurance is also important, even if you’re buying solo. If you become too sick or injured to work over a period of months or years, or the rest of your life, this coverage could help you keep your home. A financial professional can help you explore your options and get quotes.
Credit, income, and expenses
It’s best to cross the threshold of homeownership from a position of financial strength — not just for your own sake, but to meet lenders’ mortgage guidelines. Here’s what they’ll be looking for.
- Credit: Landlords care about your credit score, but it’s even more important to mortgage lenders. With poor credit, you’ll be ineligible — or limited to pricier loans with higher interest rates. If you don’t have excellent credit, it may be wise to rent while you work on your score.
- Income consistency: When you’re shopping for a mortgage, lenders typically want to see a history of stable or increasing income that is likely to continue for at least three years. Variable income from sources like commissions and bonuses can be included if you have received it for at least 12 months — sometimes longer, depending on the lender.
- Debt-to-income ratio: Requirements vary by lender and loan type, but as a rule of thumb, your proposed mortgage payment plus your existing monthly payments on credit cards, student loans, and other debts should be no more than 50 percent of your stable pre-tax monthly income.
- Expenses: People underprepare financially for homeownership by believing they can afford whatever amount of mortgage they get approved for, indicated Ferreira, Instead, they should analyze their expenses and see what they might need to cut to make the payments a lender has qualified them for.
Here are some key items to consider in your budget:
- State and federal income taxes.
- Social Security and Medicare taxes.
- Homeowners insurance.
- Property taxes.
- Private mortgage insurance.
- Homeowners association dues and special assessments.
- Maintenance, repairs, and renovations.
- Additional hazard insurance for location-specific risks like hurricanes, floods, and earthquakes.
- Retirement contributions.
- Emergency savings.
- Travel and entertainment.
- Utilities.
- Transportation.
- Food.
- Child care and education.
- Pet care.
- Medical, dental, and vision care.
- Hobbies.
- Donations.
“Another common mistake people make in analyzing whether to rent or buy a home is only factoring in the mortgage cost and not anticipating the ongoing maintenance costs that homeownership invariably brings,” Ferreira said. “As a renter, those expenses are the landlord’s problem. As an owner, they are all yours.”
Further, homeowners will always have ongoing expenses, such as property taxes and insurance, even once they pay off the mortgage. These costs tend to go up over time, Ferreira noted.
You can find sophisticated rent vs. buy calculators online that enable you to incorporate and customize everything from projected home price growth to your tax filing status. Performing calculations like these with the most realistic, local numbers you can find will help you understand the true costs to rent vs. own a home.
Long-term investment potential
Renting is not a long-term investment, but it’s not throwing money away, either. In fact, renting can free up a lot of money for investing that homeowners have to spend on insurance, maintenance, and mortgage interest.
If you won’t have the cash flow to max out your retirement savings as a homeowner, then you’re essentially betting that the financial or lifestyle benefits of owning a home will outweigh that missed opportunity. And it is a bet: There’s no way to know whether you’ll get priced out of the market if you wait to buy, whether your home will appreciate and by how much, or how well your investments will perform.
Whether your home appreciates or not, the only way to access your equity is by selling your home or borrowing against it. Either option could easily cost you 6 percent — in real estate commissions or interest and fees. Stocks, bonds, and investment funds can have fees below 0.5 percent annually and are far more liquid if you need cash — though selling them at the wrong time can be costly (as can selling your home in a down market).
Home ownership offers a couple of ways to increase your potential return on investment that aren’t available to renters.
- Rent out one or more rooms in your home. Rental income can improve your monthly cash flow or help you pay down principal faster. It also opens the door to tax deductions for home depreciation and rental expenses.
- Create a future rental property. Some people later move into a larger home and turn their first home into a rental property. Along with generating rental income, they can typically deduct all of their mortgage interest and property taxes as business expenses, as well as repairs, insurance, and utilities—all without itemizing. If they sell the home for more than they bought it for within three years of moving out, they may not owe any taxes on this gain. Even if they do, capital gains tax rates are lower than income tax rates.
- Claim a home office deduction. If you’re self-employed and use part of your home regularly and exclusively for business, you may enjoy some savings from this deduction. Suppose you use 15 percent of your home as your office and you don’t itemize your mortgage interest or property taxes, which total $15,000. You could deduct $2,250 from your federal tax return, saving $540 if your marginal tax rate is 24 percent. Other expenses that apply to your whole home, like utilities, can be similarly deducted.
That said, many people overestimate the tax benefits of home ownership.
“A common misconception is that you should have a mortgage so you have a tax deduction,” Ferreira said. “The deduction is just of the interest amount and is only available if you itemize.”
What’s more, only the itemized deductions that exceed the standard deduction actually save you money — and the savings are based on your marginal tax rate. A married couple on their 2024 tax return could claim a $29,200 standard deduction. If their itemized deductions totaled $30,200 and their marginal tax rate was 24 percent, their tax savings from itemizing would be just $240 — hardly a reason to pay thousands in mortgage interest.
Making the decision
Deciding whether to rent or buy a home is all about what aligns best with your personal circumstances. Both options have advantages and disadvantages, as well as different potential risks and rewards.
When you scrutinize your needs, goals, and financial situation, the answer should become apparent. It might change later, too, and that’s okay: These choices aren’t irreversible, though careful planning can help you avoid costly mistakes. Consider talking with a MassMutual financial professional to help ensure that you’re making an informed decision.
Discover more from MassMutual…
Buying a home together while unmarried
Renting? Maybe a better choice for some retirees
5 tips for single females buying a first home
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