Should I Rent or Buy a Home?

Renting versus owning – how to determine which is right for you

Choosing whether to own or rent a home is a big decision. The “right” answer for you will be deeply personal, based on a few key considerations that we will explore below.

1. Examine your personal values

A good place to start is with your personal values. What is really important to you in your life? Family? Freedom? Security? How do these values fit with different housing situations?

2. List and prioritize your goals

Next, think about your future. Where do you want to be in five years – financially and in general? What other financial or life goals do you have? These could include reducing your debt, paying for education, or moving to be closer to family. Where does homeownership rank among those goals?How might it affect your other plans?

3. Weigh the trade-offs of renting versus owning

Every decision has trade-offs – things you get and things you give up. Both renting and owning come with their own sets of trade-offs.

Owning a home is an important goal for many people. Homeownership has many advantages, but also requires a significant investment of time, energy, and money. It comes with responsibilities and risks.

To help make the choice that is right for you, weigh some of the trade-offs¹ listed below. Think about which would impact you the most and what you care about.

Benefits of Owning: Shelter and Wealth-Building

You may want to own a place that is all yours – a home that you can modify to fit your needs. Or, you may want to build wealth and increase your net worth over time. For many people, their home is both a shelter and their largest financial asset. When you own a home, you build equity by making monthly payments that reduce your mortgage loan balance. You can also build equity when your home increases in value over time. Equity is the value of your home minus what you owe. While you want this to be a positive number, home equity is not guaranteed.

In summary, here are the benefits you should consider:

• Greater control over decisions related to home and living environment
• Potential to build equity
• Possible tax benefits
• Roots in one community and school system
• No home inspections by landlords or other authorities, greater privacy
• With a fixed rate mortgage, principal, and interest payments stay the same

Drawbacks of Owning: Maintenance Costs and Less Mobility

Understandably, homeownership is not for everyone. You have to make repairs when needed. You have to change your spending habits, so you can make your monthly payments on time and save for emergencies and repairs. Many people choose to rent so they can have the freedom to move around. Or you may prefer that your landlord has to take care of maintenance and repairs.

Read through these downsides of owning and think about how you value them compared to the benefits of owning.

• Risk of property value loss
• Limited flexibility with relocation
• Higher upfront costs (compared to renting)
• Usually higher monthly costs for housing and utility expenses
• Liability for accidents on the property
• Responsibilities for home repairs, maintenance, and yard work

Both renting and owning require you to make payments on time. Otherwise, you run the risk of losing your home through eviction or foreclosure.

4. Take a look at your current financial situation.

In this moment, where are you financially? How would you rate your financial health?

Your financial health can affect your ability to rent or own a home. Most landlords and all lenders will consider your credit history, for example, when deciding to rent you a place or give you a home loan. Lenders, however, look more carefully at your overall financial health when measuring your ability to buy a home.

You will need a credit score of 620 for a conventional loan or 580 for a government-backed FHA loan to buy a home. Additionally, you must have enough saved for the upfront costs of homeownership, including the down payment and closing costs. On average, these costs add up to 15 percent of a home’s purchase price. Finally, you must show that you earn enough to make the new mortgage payment while continuing to pay your living expenses and debt.

If you wish to buy a home and your financial health does not yet measure up, what would it take to get you financially ready?

5. Get more information

If you are leaning toward homeownership, sign up for a homeownership education class from a local nonprofit organization. Buying a home can seem like a complicated process, with many people and steps involved. A class can give you the tools and knowledge to successfully navigate the purchase process and take a realistic look at what you can expect from homeownership. The more you know, the easier it will be if you decide that homeownership is right for you.

¹ Trade-offs adapted from Motivational Interviewing by William R. Miller and Stephen Rollnick.