Renting Versus Buying a Home: The Upfront Cost and Other Financial Differences
When it comes to housing and deciding on renting versus buying a home, there are pros and cons to both. Understanding the financial differences between the two options can help you make an informed decision about which is the best choice for you.
One key difference between renting and buying is the upfront cost. When you rent a home, you’ll typically need to pay a security deposit and possibly first and last month’s rent. The amount of the security deposit is usually equal to one month’s rent, but it can vary. The first and last month’s rent is often required to be paid upfront, in addition to the security deposit. This means that typically a renter may need to come up with a total of 3x the monthly rent in order to move into the rental property.
On the other hand, when you buy a home, you’ll need to come up with a down payment. This can be a significant amount of money. The size of the down payment will depend on the type of mortgage you get and the price of the home. On average, down payments range from 3.5-20% of the purchase price of the home. And then you will also owe closing costs (which include lender fees, title fees, and property taxes), and those are typically around 2-4% of the purchase price.
With both options you will also need to consider the cost of moving. The cost of moving can vary widely depending on a number of factors, such as the distance of the move, the amount of belongings you have, and the type of service you use. On average, a long distance move can cost $2,000-$5,000, while a local move may cost $500-$1,000. If you have a lot of heavy or bulky items, such as furniture or appliances, you may need to pay extra for specialty services. Additionally, if you choose to hire professional movers, you may need to pay for packing materials, insurance, and other fees. It’s a good idea to get quotes from multiple moving companies and carefully consider the services and costs included in each quote before making a decision. Click here for a great moving cost calculator from Moving.com.
Another financial difference between renting and buying is the monthly payment. When you rent a home, you’ll typically pay a monthly rent payment to your landlord, which will cover the cost of the property and any common expenses, such as property taxes and insurance. Rent payments are generally lower than mortgage payments, but they can vary based on the location, size, and condition of the rental property.
On the other hand, when you own a home, you’ll have a mortgage payment, which will cover the cost of the loan used to purchase the property. In addition to the mortgage payment, you’ll also be responsible for paying property taxes, insurance, and any necessary repairs or maintenance. These additional costs can add up, so it’s important to consider them when comparing the cost of renting and owning a home. In general, owning a home tends to be more expensive than renting on a monthly basis, but it can also provide you the opportunity to build equity over time and sell the property for a profit, as I discuss below.
Building Equity and Investment
One major advantage of buying versus renting a home is that you will likely be able to build equity over time. As you make mortgage payments, you’ll own a larger share of your home. If the value of your home increases, you may be able to sell it for a profit. On the other hand, when you rent a home, you don’t build any equity and you don’t have the opportunity to sell the property for a profit.
Another financial consideration is the long-term cost of renting versus buying. Over a long period of time, renting can be more expensive than buying. This is because the monthly rent payments you make don’t go towards building equity in a property, as a mortgage payment would. Instead, they go towards paying your landlord’s mortgage.
Let’s say you’re considering renting a home for $2,500 per month or buying a comparable home for $450,000 with 5% down and a 30-year mortgage at a 6% interest rate. If you choose to rent, you’ll pay a total of $343,916 in rent over a 10-year period (assuming rent increases of 3% per year). And that is money you will never see again. On the other hand, if you choose to buy the home, you’ll pay a total of $357,570 in mortgage payments over the same period (including principal, interest, and average taxes and insurance). However, since you own the home, you will be paying down the mortgage and be able to sell it for potentially everything you have paid in thus far, or possibly for more than you have paid (depending on your home’s appreciation). With renting you are out 100% of the money you put in.
Ultimately, the decision to rent or buy will depend on your personal circumstances and financial situation. It’s a good idea to carefully consider the costs and benefits of both options before making a decision. Factors to consider include your budget, your long-term financial goals, your ability to commit to a mortgage, and your lifestyle preferences.
If you’re unsure about whether to rent or buy, it may be helpful to consult with a financial advisor or a mortgage broker who can help you weigh the pros and cons of each option and make an informed decision. And if you need a recommendation for a lender, reach out; I’d love to help! I can connect you with a lender I have used for many years and who I know will give you their best rates and programs.
If you’d like to know more about the differences between your typical home loan options, or great down payment assistance options where you can reduce the amount of your down payment needed to as little as $1,000, click on the respective links.