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Buying vs. renting a home: Which is right for you?

Parents looking at daughter playing in new house
Morsa Images/Getty Images

There comes a time when many people face a major life decision: to buy a house or not? In today's struggling economy—and the accompanying skyrocketing housing prices—solving the buying vs. renting a home conundrum has become even more complex than usual.

In the first quarter of 2022, the median single-family home sale price was $368,200. That's an increase of 15.7% over the previous year. In addition, the average monthly mortgage payment (after putting 20% down) is $1,383, which is $319 higher than it was in 2021. Don't flock to an apartment complex quite yet, though, because rent is also on the rise. The average one-bedroom apartment is $1,751 per month, a 26.5% gain since 2021.

Prices vary depending on where you want to live, and these numbers may be higher or lower in your region. But the reality is that living expenses are way up.

To make the smartest decision for you and your family regarding where and how you live, the only thing you can do is run the numbers.

Buying vs. renting a home: Financial considerations

First of all, whether you're considering renting or buying, one factor plays a vital role in your decision-making: your credit score. A low credit score may mean you won't qualify for attractive rates on mortgages or governmental housing programs. It also can contribute to you being outright rejected as a tenant by a prospective landlord.

So before you set out on this quest to find an ideal living situation, make sure you know the status of your credit score. You may find that the smartest thing to do is to stay right where you are for a few years while you improve your score. You might find yourself with more options for both renting and buying later on.

Here are some other financial considerations for both owning and renting:

Upfront costs you'll need to pay right away

Hefty deposits, fees and other payments can come with purchasing a home or renting—before you even receive the keys to your new place. These upfront costs are just a component of moving and typically cannot be avoided.

If you're planning on buying a home, some costs to watch for include these:

  • Earnest money. Also known as a good-faith deposit, this is a small deposit (usually 1% to 3% of the purchase price) to show sellers you are serious about buying. If your offer is accepted, you can usually put the amount toward your down payment or closing costs.
  • Down payment. Conventionally, 20% of the price is a standard down payment. Although, lenders often allow you to put down less than that, and various government loans and programs may be available and bring that cost to 3% to 10%. Regardless of the amount, you'll need that cash on hand at the closing.
  • Closing costs. These are usually 2% to 6% of the home's purchase price and go to your real estate agent, lender and any other third parties involved in the deal. They may also include taxes, underwriting and title fees. This money is due at closing along with your down payment.
  • Home inspection. Many buyers choose to have a home inspection before closing to determine if anything major is wrong with the home. An inspection usually costs a few hundred dollars. (Depending on the condition of the home, you also may have some repair or maintenance work to take care of right away as well.)

The upfront costs of renting an apartment or house aren't nearly as high as buying, but there are a few to note:

  • Application fee. Many landlords will charge for the process of vetting potential tenants. These fees are typically between $25 and $100 and may go toward running your background check and credit report.
  • First and last month's rent. It's common for renters to be required to pay both of these before moving in as a financial safeguard for the landlord.
  • Security deposit. Most landlords also require a security deposit in case of damage. This amount can vary from a few hundred dollars to the equivalent of a month's rent.
  • Broker fee. Depending on where you live and if you get help from a real estate agent, you may need to pay this fee for services. These costs also range from a few hundred dollars to a month's rent.

As you consider these upfront costs—whether for renting or buying a home—you'll also want to factor in any moving expenses or potential storage rental needs.

Recurring costs you'll pay long-term

You may think that deciding to rent or buy comes down to one simple question: is the mortgage cheaper than rent? Those may be the largest line items, but you'll quickly find that ongoing costs tend to follow. Obviously, some of your monthly expenses—such as cable or internet service—will be the same regardless. However, certain recurring costs are particular to owning and renting.

These are some of the potential hidden costs of homeownership:

  • Insurance. Many mortgage lenders require the homeowner to carry house insurance. The cost of it varies depending on your state and insurance provider, but the average premium is just under $1,300 per year.
  • Homeowners association (HOA) fees. You may live in a neighborhood or building that requires monthly HOA fees. These often help to cover the costs of maintenance, landscaping and other community improvements.
  • Property taxes. While some people qualify for exemptions, homeowners generally have to pay taxes on their property's value. The rates vary depending on location and may be assessed monthly, quarterly or annually.
  • Maintenance and repair. The many moving parts in a home (think electrical and heating systems, roofs and major appliances) can break down or wear out over time. You'll want to make sure you have some money earmarked for fixes and replacements.
  • Landscaping. Depending on your budget or property size, you may decide to pay for landscaping and upkeep. In some climates, this may include snow removal.

Renters typically don't have as many recurring costs, but there are still a few:

  • Insurance. Many landlords request that tenants have renters insurance. On average, these premiums are just under $200 a year.
  • Pets. If you have a pet, your landlord may request an additional, often nonrefundable deposit or charge a monthly "pet premium" to cover potential damages.
  • Parking. Sometimes parking is free or factored into the rent, but if you live in a city or congested suburban area, you may have to pay an extra $50 to $300 a month.
  • Laundry. If you don't have in-unit or free shared facilities, you'll have to take your laundry somewhere. It's not uncommon for a load to cost $5 or more to wash and dry.

Buying vs. renting a home: Big picture

Once you understand the common upfront and recurring expenses, you'll want to widen the lens and look at several other elements that could affect your decision to rent or buy. Renting may be better if you have unstable employment, but owning offers a more stable payment as it could be the same throughout the life of the loan.

Family situations

You never know what life may bring—there could be a marriage, a new addition to the family, boomerang college graduates or aging parents who need care. Any of these might mean a change in housing. Consider both your short- and long-term needs to the best of your ability.

Tax considerations

Homeowners may be eligible for certain tax benefits that renters aren't. For example, the IRS's home mortgage interest deduction allows homeowners to reduce their taxes by counting interest paid on home loans for buying or improving a home against their income. However, as a homeowner, you also need to pay property tax—something renters don't need to add to their budget.

Investment potential

Property ownership can lead to investment opportunities. You might purchase a multifamily home and live in one unit and rent out the others to help cover your mortgage and other house-related expenses. Or you may find yourself able to buy a place you can rent out for part of the year for income.

If that's your plan, make sure you run the numbers not just for buying but also for renting. Some factors and costs to weigh may include these:

  • Property management. If you don't live near your property or have the skills to manage it, you may want to pay someone else to do it for you.
  • Rental comparisons. Look at what others are charging for other similar units in the area to get a realistic idea of what you could charge for rent.
  • Maintenance. If you aren't skilled in this area, you may have to hire someone or contract with a property management company to handle any issues.
  • Your income. Determine if you can afford a bigger mortgage or possibly two mortgages, including times when you can't find a tenant or renter.

Buying a home based on its investment potential isn't the best fit for everyone, so make sure you take a detailed look at your finances and talk to local experts to learn the ins and outs of the process.

Time commitments

Maintaining a home often demands time—something many people don't have in excess. Homeowners may need to schedule whole days to do yard work and repairs while renters typically have those things taken care of by their landlord or a property manager.

Property value

Homeownership is often seen as a path to building generational wealth. However, property values don't always go up. You'll want to keep in mind the ongoing costs of maintaining your property. Repairs, wear and tear, natural disasters and more may affect your home's property value over time.

Buying vs. renting a home: Bottom line

There's no one-size-fits-all answer when deciding between buying a home or renting. The important thing to remember is to take a clear-eyed look at your financial situation and needs and then make the best decision for you. Working with a financial advisor to go over your financial health may help you decide.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.