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May 21, 2021

Buying vs. Renting - What's Right for You?

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Deciding to rent or buy your home takes careful consideration. There are a lot of factors to consider, like whether you can afford the up-front costs of a home loan, how long you plan to stay in your current location and if you want something small or space to raise a family. It can be overwhelming to feel like you have to decide what’s right for you, right now. To help you make a decision, we put together a list of pros and cons along with some helpful resources.


Pros of Renting

  • Flexibility. You can leave when your lease is up if a job takes you to a new city or you need a change of scenery.
  • Repairs aren’t your problem. or at least the cost isn’t as long as you aren’t the one who causes the damage. In most cases, the landlord or property manager will take care of any leaks, broken appliances, etc.  
  • Fixed monthly costs. Often times housing expenses such as utilities, garbage or water are more consistent.
  • No loan necessary. Plus, no closing costs. The most you’ll have to pay up front is the security deposit.


Cons of Renting

  • Minimal flexibility in customizing. Want to update the bathroom or lighting fixtures? Prefer hardwood over carpet? Not in a rental. If you’re lucky, you’ll be allowed to paint a wall with a pre-approved color.
  • Rent may go up every year. Depending on location and demand, you could see an increase in rent each year.
  • You’ll never get the money back. While renting is not “throwing money away”—you need a place to live, after all—you won’t ever get rent money back. However, if you buy, your home becomes a valuable investment and a major financial asset.


Pros of Buying

  • You build equity over time. More on this later. Essentially, your home will become a major asset. Plus, real estate is generally an appreciating asset. Although there is no guarantee it will go up and the location you choose to buy makes a difference.
  • Financial predictability. A fixed-rate mortgage payment doesn’t change.
  • A sense of community. Being able to stay in one place for a number of years makes it easier to get to know your neighbors and to feel more invested in your community.
  • It’s your canvas. Home renovation shows make most of us starry-eyed, but if you’re serious about putting your creativity or craftsmanship to the test, owning may be for you.


Cons of Buying

  • Responsibility. Houses need regular maintenance in order to hold their value. And maintenance is the homeowner’s responsibility. In the colder climates we have in Minnesota and Wisconsin, you’re going to want to ensure your roof, siding, windows, furnace and AC (or HVAC systems) are in good condition, and replacing them upkeep could potentially be costly.
  • Commitment. To get the most out of your investment, you’ll want to stay put for at least a few years to build equity and recoup any closing costs.
  • Risk. It’s possible that the value of your home will go down, such as if your local real estate market decreases in value.


Building Equity

One of the primary benefits of buying a home is that it's a financial investment. As you make monthly payments on your mortgage, you build equity. Equity is the current market value of your home minus the amount you owe on your mortgage. In other words, it's the portion of your home that you actually own.

For instance, let's say your home is worth $250,000, and you currently owe $200,000 on your mortgage. That means you have $50,000 of equity. As you pay down your mortgage, your equity will continue to increase. In addition, as the market value of your home increases, so will your equity, which allows your money to grow while you do virtually nothing. This money can be used to borrow against in the future or to turn a profit when you sell.

When you rent, you help someone else build equity. As a renter, your money typically goes toward paying your landlord's mortgage, and the landlord builds equity instead of you.
 

Can you afford to buy a house?

Traditional wisdom used to be that you shouldn’t buy a home until you could put 20% of the purchase price down. That’s no longer the case. In 2019, the National Association of Realtors found that the average down payment for first-time home buyers was just 6%. Conventional loans allow you to put down as little as 3%. There are now programs for people who want to put little, and in some cases even no money down.
Whether you can afford a down payment is not the only financial factor, of course. For one, it’s wise to have a decent emergency fund in place. And do you have money set aside for unexpected repairs that home insurance may not cover?

Let’s say you feel comfortable with your ability to pay a mortgage and the other costs of homeownership. To get an estimate of how much you would be approved to borrow, check out our mortgage qualifier calculator.


So, what's right for you?

The ability to build equity is a key advantage of buying a home, but your decision ultimately comes down to what makes financial sense for you right now, as well as what is going to increase your overall quality of life. It’s an emotional decision as much as a financial one—and that’s ok.

If you want someone to help you crunch the numbers, or if you’ve decided it’s time to buy, let’s set you up with a free consultation with one of our mortgage specialists.

 


Sources: Consumer Financial Protection Bureau, National Association of Realtors, Zillow, NerdWallet

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