There comes a time when many people face a major life decision:
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In the first quarter of 2022, the
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:
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 lessthan 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.
You never know what life may bring—there could be a
Homeowners may be eligible for certain tax benefits that renters aren't. For example, the IRS's
Property ownership can lead to
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.
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.
Homeownership is often seen as a path to
Buying vs. renting a home: Bottom line
There's no one-size-fits-all answer when deciding between