Renting vs. Buying: Which is Better for You?

Buying a home may seem like a great investment that will help build wealth. Though many American adults dream of purchasing houses adorned with white picket fences in picturesque neighborhoods, they’re often unfamiliar with the numerous risks and unanticipated costs of homeownership. 

Property taxes, general maintenance, and repairs can come as unwelcome surprises to homebuyers. Those with low credit scores, high student loan balances, or financial uncertainty may be better off renting while paying down debt and building good credit.

Here are a few things you should consider before buying:

What’s your five-year plan?

How long are you planning to stay in your current location? If it’s less than three years, renting a home or apartment is a better option than buying, because most lease agreements end after 12 months. If you intend to stay in one area for a longer period of time, purchasing a property would make more sense financially. Insurance payments, appraisal fees, closing costs, broker charges, and mortgage origination fees can add up to 10 percent or more of the total cost of a home. In addition, homeowners are advised to stay in a property long enough to allow it to appreciate and pay off a large chunk of its value.

Potential homebuyers should also have at least 3-6 months of living expenses socked away in a high-yield savings account to prepare for any unexpected financial setbacks they may encounter. This may be difficult if potential buyers have a high debt-to-income ratio (DTI), which is the total amount of an individual’s debt divided by their gross monthly income.

A borrower’s DTI should be less than 36 percent when approaching lenders. Unfortunately, student loans with high-interest rates, credit card debt, and car payments can negatively impact DTI. Add a monthly mortgage payment and annual property taxes, and many find that they’re better off renting as they pay off debt and save money for the future purchase of a home.

What’s your credit like?

Whether you hope to rent or buy, your credit score is important. It allows landlords and lenders to understand how financially responsible you are. A credit score of 800 or higher is considered excellent, while 739-799 is seen as very good. A score of 670-738 is good, and anything below 670 is average to poor.

Before purchasing a home or renting an apartment, check your credit score. If it’s not within the ideal range, don’t panic. There are many simple ways USALLIANCE can help boost your credit! Opening a secured credit card, obtaining a credit builder loan, tracking monthly rental payments, and using online budget or money management tools can increase your credit rating before you become a homeowner.

Can you afford a down payment?

Paying at least 20 percent of a property’s value upfront can save money over time and help secure a lower interest rate. Current mortgage interest rates typically range from 3-5 percent but can vary based on one's credit score and history.

The average price of a U.S. home is around $331,533, which means a 20 percent down payment adds up to about $66,306. This may seem high, but putting down more cash upfront means a smaller loan and less overall debt, leaving more money for future home or property maintenance and repair costs.

Closing or settlement costs should also be taken into account before buying. Closing costs are fees that are paid when securing a loan for a home purchase. They can range anywhere from 3-5 percent of the total amount of a loan.

If you’re unable to fork over a down payment, renting is a better option. Upfront rental costs are much cheaper than the down payment on a home. The average price of renting a one-bedroom apartment in the U.S. is about $1,684. Tenants are typically required to pay a security deposit (equivalent to one month’s rent) and the first month’s rent, which comes to about $3,368.

Are you prepared to own a home?

Unlike tenants who reside in rental properties, homeowners are responsible for all maintenance, repairs, and renovations that their property may require.

Additional costs such as insurance and local property taxes may catch first-time buyers by surprise. Setting aside at least 1 percent of a home’s total value each year is recommended to cover these expenses.

The average U.S. household pays $2,735 in property taxes annually. In the U.S., property taxes can range from less than 1 percent to nearly 2.5 percent, but the added expense should be considered before purchasing a home. Homeowners in states like New Jersey, Illinois, and New Hampshire can expect to pay up to 2.47 percent of their home’s value in property taxes each year. Those who purchase condominiums or homes in a housing development will also likely have to pay homeowner fees or maintenance costs, which can range from $100-$700 per month.

Should I rent or buy?

Still not sure which option is better for you? USALLIANCE can help you meet your financial goals and prepare you for homeownership, whether you’re building credit or maximizing savings. Visit usalliance.org to learn more about our products and services.