You need a place to live, and that always costs money in one way or another. While it's true that you aren't building equity with monthly rent payments, not all of the costs of homeownership will go towards building equity.
When you own, you might pay nothing more than your mortgage and regular bills in one month. While you might be temporarily inconvenienced by a leaking roof as a renter, it's unlikely you'll ever have to pay to replace your roof when you rent. Your monthly, home-related expenses, such as renter's insurance, tend to be more predictable and significantly cheaper. As a renter, you face unpredictable rent increases each time your lease is up for renewal unless your apartment is rent-controlled.
If you live in a desirable part of town, rent increases can be steep. In contrast, if you get a fixed-rate mortgage, your monthly house payments will never increase though property taxes and insurance premiums probably will. While homeownership is often touted as a way to build wealth, your home can lose value. The acceptable neighborhood you moved in could decline.
A major employer can leave the area, causing a significant population decline and a surplus of housing. Alternatively, there could be a residential construction boom, which could also keep prices down. Another bit of misleading conventional wisdom: Get a mortgage to get the tax deduction. True, the home mortgage interest deduction reduces your out-of-pocket expenses for mortgage interest early in your loan term, as long as you're itemizing.
If you don't have enough deductions to itemize and claim the standard deduction, there is no tax benefit to you as a homeowner. Of course, renters get no mortgage tax deduction at all. But they can take the standard deduction that's available to all taxpayers. Do you like having your evenings and weekends to use as you please?
Do you work long hours or travel frequently? If so, then the time commitment that comes with homeownership might be more than you want to take on. There are always projects around a house that you will need or want to take care of, from finding a plumber to replacing a rusted-out pipe and repainting the bedroom to mowing the lawn.
If you live in a community with a homeowners association HOA , the HOA might take some homeownership chores off your plate. That will usually cost a few hundred dollars a month.
But beware of the headaches that association membership can entail. If you rent, your landlord will take care of all the repairs and maintenance, though of course they may not be done as quickly or as well as you would like. Although not as universal as homeowners' insurance, renters' insurance is often recommended and sometimes required by landlords for those leasing homes or apartments. Homeownership brings intangible benefits, such as a sense of stability, belonging to a community, and pride of ownership.
However, it is not good for restless or nomadic types. Real estate is the original illiquid asset. You might not be able to sell when you want if the housing market is down. Changing your mind about where you want to live is far more expensive when you own. The overall cost of homeownership tends to be higher than the overall cost of renting. That is true even if the monthly mortgage payment is similar to or lower than the monthly rent. Perhaps the biggest throwaway expense is mortgage interest, which can make up nearly all of your monthly payments in the early years of a long-term mortgage.
It will be about 13 years before more of your monthly payment goes toward principal than toward interest. Even renovation projects don't often increase your home's value by more than what you spend on them.
On average, you'll get back 66 cents for every dollar you shell out on a home improvement project, according to Remodeling magazine. The best return and the only one on Remodeling's list that comes close to recouping its entire cost comes from replacing a garage door.
Which option is best for you isn't just about money. It is also about comfort and your vision for your life. Ignore people who tell you that owning always makes more sense in the long run or that renting is throwing away money. Also, disregard those who say that it makes more sense to buy if your monthly mortgage payment would be the same or less than your monthly rent payment. Housing markets and life circumstances are too varied to make blanket statements like these.
More importantly, you should always ignore anyone who discourages you from buying a home because of race, religion, or marital status. Unfortunately, people were often prevented from owning land-based on race or their beliefs in the past. If you stay in your home for 3 years, renting is cheaper than buying. The renting-vs. Buy Calculator, things you may already know or have been tossing around in your mind:.
To make things easy, we made a number of assumptions about other typical costs that factor into this calculation. But again, you can adjust these figures to exactly what applies to you. The Rent vs. Buy Calculator uses the everyday costs of renting and buying to compute and refine results. For home buying, the Rent vs. It takes into account typical spending on home renovations and maintenance.
You can adjust all of those pre-filled areas. Buy Calculator also accounts for the accumulation of equity from mortgage payments and the effect of growth or decline in home prices.
It factors in any long-term capital gains and also bakes in the opportunity cost of using savings for a rental deposit and a down payment instead of investing the money.
Location counts. Where you choose to live may decide the buy vs. In high-priced real estate markets like San Francisco, renting could be the only affordable option.
In addition to home prices and monthly rents, important factors when deciding where to live include safe neighborhoods, good schools, proximity to public transportation, walkability, drive times to work, shopping and recreation. Also consider the supply of rentals or newly built homes: Are they appealing, plentiful and affordable?
Style — of a home, an apartment, a town or a neighborhood — plays a role, too. Some pieces of our decision are not easily quantifiable, but they could be the most important, such as:. The upfront cost of buying a home is the biggest barrier for many would-be buyers. And then there are repairs, upkeep and the cost of furnishing and upgrading your new crib.
A handful of shifting factors can also influence your answer, many of them out of your control, like the direction of the housing market, interest rates and returns on investment. When comparing the two options, renting can often come out ahead, at least compared to the early years of a home purchase.
The virtues of buying grow when you stay in a home for a while. Just as home buyers face upsides and downsides to buying, renters have their own set of pros and cons. Here are the most important ones. Whether or not you should rent or buy a house may seem like an apples-to-apples comparison if you look at monthly costs alone. Long-term costs, however, paint a different picture. Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since Millions of people have used our financial advice through 22 books including 12 national bestsellers published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
Guided Plans. Trusted Pros. Free Tools. Should I Buy a House? Are you ready to buy? Are you out of debt? Do you have a full emergency fund saved? Do you plan to stay in the same location for more than three years?
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