Renting vs. owning a home

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You’ve probably heard the sentiment that renting is throwing out money. This, of course, isn’t a fair statement. There are positives and negatives to both renting and owning property, and the right choice often depends on your specific circumstances. Keep reading for a closer look at the renting vs. owning debate. By having a comprehensive view of the pros and cons of both sides, you can make a more informed decision on what the best option for you is. 

Should you buy a home?

The COVID-19 pandemic affected the housing market in a way that no one predicted. Experts assumed that as people’s job security decreased, the housing market would take a dip as people had to sell their homes quickly. Instead, when people transitioned to remote work and spent more time indoors, they became more invested in their homes. People wanted more space for themselves and looked at upgrading. 

Combine this new demand with record-low inventory levels and low interest rates, and 2021 saw a massive housing market spike as demand grew. According to the National Association of Realtors, housing prices rose at a rapid pace during the pandemic. The median price of a home in July 2021 ballooned to $363,000—which was a 23.4 percent increase year over year. 

All this is to say that if you’re ready to buy a home and take advantage of some low interest rates, you’re not the only one. The housing market has seen a boom over the pandemic without any signs of slowing down. If you’re looking to buy, you can expect the competition to be fierce and the inventory low. This plays a part in the renting vs. owning debate about whether right now is the most suitable time to purchase. 

Pros

There are many benefits to purchasing property, including:

• A worthy investment: Generally speaking, houses tend to increase in value. Even when the housing market takes a dip, it tends to recover after a few years, so you just have to wait it out. 
• Equity: Purchasing a home can be a great way to build equity and force yourself to save in a worthwhile investment. 
• Many loan options: There are many ways you can finance a home, including a conventional mortgage, government-insured mortgages, adjustable-rate mortgages, jumbo mortgages and fixed-rate mortgages. Depending on your situation (size of down payment, credit history, etc.), you can find the loan that fits your needs. 
• Building up your credit: Your mortgage payments can help you build positive credit, as long as you make all your payments in full and on time. 
• Tax deductions: Homeowners can use their mortgage interest as a tax deduction. You can also earn tax deductions for your real estate taxes, private mortgage insurance (PMI), medically necessary home improvements and energy efficiency upgrades. 
• Stability: Owning a home provides you with a sense of stability. You know that no one can end your lease and kick you out of your home. This feeling of security and routine is especially valuable to families who want to avoid uprooting their kids.
• Freedom: When you own a home, you generally have the flexibility to do what you want with it. This means you can paint, take on renovations and do more without asking a landlord for permission. 
• Saving money over time: If you own a home long enough and do a cost comparison with renting, homeownership will likely be cheaper. Between building equity and the increase in your home’s value, your home can contribute significantly to your personal wealth. 

Cons

Purchasing a home does come with its downsides, and buyers must be aware of the bad as much as the good: 

• More expensive in the short term: Buying a home is costly. You have to pay the down payment and all the fees associated with buying a home, and you have to consider additional expenses like renovations, upkeep and home furniture. If you look at purchasing a home for the short term, it’ll be more expensive than renting. 
• Maintenance: Without a landlord, the cost and headache of care are entirely on you. 
• Potential decrease in home value: If you’re planning to keep your home for 20 to 30 years, you’re almost guaranteed to see an increase in its value. However, the housing market has its up and downs, which can be tricky for short-term buyers. If you end up leaving your home in three or five years, there’s a possibility your house will have gone down in value. 
• Lack of flexibility: A home really ties you down to an area. It’s a considerable investment, and as we mentioned, it’s often not financially wise to sell a home too soon after purchasing. If you’re not quite ready to commit to an area, owning property can feel quite restrictive. 

Requirements to buy 

Buying a home is probably one of the largest purchases you’ll make, and it’ll require a lot of preparation. In order to be approved for a mortgage, you’ll need:

• A solid credit score: You need a credit score of at least 620 for a conventional mortgage, although there are other lending options for people with a score below 620. The higher your credit score, the better chances of approval, low interest rates and good loan terms. Many prospective homebuyers start improving their credit score in the months leading up to their purchase. 
• A stable income: Another vital factor in being approved for a mortgage is showing a steady income. Future homebuyers are encouraged to avoid quitting or switching jobs until they’ve locked in their home purchase. 
• Low debt: You’ll be approved for a mortgage based on your creditworthiness, current income level and affordability. If you have large outstanding debts (such as car loans, student loans or private loans), that can impact your ability to be approved for a mortgage or the amount you’re approved for. This is why paying down debt before applying for a mortgage is essential. 
• A down payment: In order to purchase a home, you usually need a down payment. Individuals can acquire a conventional loan with as little as a 3 percent down payment. Additionally, if you have anything under a 20 percent down payment, you’ll have to pay private mortgage insurance. (Note that some loans, such as USDA and VA loans, don’t require a down payment.) 

You’ll need to consider and prepare all the above factors before being ready to purchase your first home. 

Should you rent?

We’ve already covered how the housing market spiked in 2021. Unfortunately, we can’t say things are much better on the rental market side. In comparison to March 2020, the median price for a one-bedroom apartment increased nationally by 10.7 percent. And two-bedroom apartments increased by 13.1 percent. 

While some cities, such as New York, saw dramatic decreases in rent with the start of the pandemic, that’s no longer the case. If you have a reasonable rental price, now might be the time to hold onto it. 

Pros

Despite what some people say, renting has many advantages, including:

• Lower credit requirements: Some rental properties run a credit check, but overall, the credit requirements for renting are much more relaxed than when buying property. 
• Lower monthly payments: Currently, in most markets in the U.S., your monthly rental payment would be lower than a mortgage payment, unless, of course, you had a huge down payment saved up. 
• Fewer costs up front: Other than your rental payment and rental insurance, there are usually no additional up-front costs to renting. In comparison, homebuyers have to pay the fees associated with purchasing a home, maintenance costs, upkeep costs, private mortgage insurance, homeowner’s association fees and more. 
• Flexibility: Renters have the option to relocate quite quickly. If a new job opportunity comes up or they desire to live somewhere new, they don’t have to concern themselves with selling their property first. 
• Less responsibility: Renters typically don’t have to worry about maintenance and other costs (such as pest control). One of the perks of being a renter is that every time there’s a problem, you simply have to call your landlord to fix it. 

Cons

As with most things, renting has both its negatives and positives. Some of those downsides are:

• Not beneficial to your credit: Usually, your rental payments do nothing to help your credit, as this is data the credit bureaus don’t typically collect. However, rent reporting is sometimes an option for those who want to build up their credit. 
• No tax deductions: As we mentioned, homeowners can take advantage of several tax deductions, saving hundreds to thousands of dollars annually. There are few tax deductions for being a renter. 
• No equity: Unfortunately, you don’t see any equity from rental payments. 
• Landlord problems: While having a landlord can be great for maintenance, it can also often be a headache. Landlords can be intrusive, have strange rules and limit what you do in the space. 
• More expensive long-term: If you’re comparing the cost of renting vs. owning long-term, renting is likely the more expensive option. While buying is more costly up front, you often see that value come back rapidly as equity builds and your property value increases.  

Requirements to rent

Some of the requirements to renting are:

• Credit: Many landlords and property management groups will review your credit score during the application process. Generally speaking, most landlords want to see a credit score of at least 620. 
• Background screening: You may be subject to a criminal background screening. 
• Deposit: Most landlords expect a deposit for the first and last month’s rent. Additionally, you may have to pay an extra deposit for having a pet, a parking spot or access to a storage unit. 

Factors to consider when choosing between renting and owning

When asking yourself whether you should rent or own, there are several essential factors you should consider. You should first look at your credit—if you think you want to buy a home, you’ll want to spend some time getting your credit score as high as possible before purchasing. 

Additionally, you’ll want to consider the needs of your family, as buying often means downsizing. If you can only afford to buy a tiny space for your family size, renting might be the better option for now. 

Lastly, consider whether you’re ready to be tied down to one place for several years. Purchasing a home is a commitment, so it’s best that you love the area you’re buying in. 

If you’re still undecided, you can use a rent vs. buy calculator. These kinds of tools compare the costs of renting vs. buying and allow you to put in a time frame. You’ll be able to concretely see what’s the best financial decision for the next three, five or 10 years. 

Ultimately, you must make the best choice for yourself. And regardless of whether you’re buying now or later, you should be proactive and start working on your credit. A good credit score can help you secure rental leases now and get mortgage approval in the future. If your credit is low and you don’t know where to start, consider using professional credit repair services from CreditRepair.com. 

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Note: The information provided on CreditRepair.com does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only.

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