When it comes to buying a home, the rise of interest rates over the last year has changed the equation for some folks. Rather than rushing into the housing market and preparing to outbid the competition for the house of their dreams, many prospective homeowners have pressed the pause button on purchases and begun comparing the benefits of owning vs. renting.

Truthfully, more than a few future first-time homebuyers have historically paused as they consider the big jump from renting to owning. For many families and individuals, renting has typically been their singular reality, and even as they’ve kept their eyes on the prize (buying a home), they’re equally committed to a sound financial decision. And word on the street these days is that renting a home might make more financial sense than buying one.

But exactly how accurate is that perception? It often seems that people who say that renting is the superior option aren’t always taking into account the full spectrum of factors. So let’s take a closer look at the age-old question of renting vs. buying and try to figure out where the real value lies in 2022.

Initial costs

There’s little doubt that the initial costs of buying a home outweigh those of renting. However, when you plunk down a 20% down payment you aren’t just securing a property for the next 12 months, you’re entering into an agreement to buy a home—a purchase of great magnitude that ushers you into a deeper connection with your community. So while renting is cheaper, you’re also getting less. That said, if less upfront expenses is the deciding factor for you, then renting is decidedly the cheaper option.

Years planning to stay

When it comes to figuring out if it’s better to buy or rent, the expected number of years you plan to stay looms large as a factor. Remember, the value of owning becomes more evident over time. Not only are you building equity but many of the upfront fees are spread out over time. Except in currently overvalued coastal areas, most homeowners will receive more financial advantages buying a home than renting one.

Taxes and tax deductions*

Every homeowner pays yearly real estate taxes, and the more expensive your home, generally speaking, the more taxes you owe state and federal coffers. Renters are spared from these sorts of taxes.

There is good news for homeowners, however: You can deduct a large portion of the interest on your mortgage. Indeed, homeowners are allowed to deduct home mortgage interest on the first $750,000 ($1M if the mortgage was secured prior to December 14, 2017). 

Equity

Equity is really where the rubber hits the road when it comes to buying a home. When you rent a house or an apartment, you are not building any equity—unless you count the equity you’re building for your landlord. That’s why buying a home is considered to be  such a great investment over time: It enables you to build wealth.

While building equity is fairly straightforward, it is not guaranteed. It requires you to consistently make payments that reduce the principal  (which is the cost of your home minus your initial down payment) and it’s also dependent on the marketplace. To create wealth, your home needs to appreciate in value over time. If for some unexpected reason your home depreciates in value (as determined by a professional appraiser), then your equity building plan will fail to materialize.

The good news is that the American dream of homeownership is healthy and sound, and the vast majority of homeowners who make their monthly mortgage payments will build equity over time. Renting can’t compete with that.

Maintenance and Fees

Both homeowners and renters are on the hook for certain fees. However, homeowners have a bigger stake in the property they live in and they also have a larger burden when it comes to maintenance and fees.

For example, a typical homeowner of a home purchased for $250,000 might need to spend approximately 1% on yearly home maintenance (equivalent to $2,500). Add to that homeowner’s insurance, owner-paid utilities and other miscellaneous fees and the costs start to mount.

Renters, of course, do not skate away fee-free. They might have to pay renter’s insurance, an initial broker’s fee as well as fork over a security deposit—the latter being a large sum of money that could otherwise be invested. Yes, it’s less than a buyer would pay, but renters also receive less in return: less freedom to decorate, less freedom to renovate and zero opportunity to build intergenerational wealth. Still, we’re talking about finances here.

Monthly rent vs. monthly mortgage

Let’s say you bought a home for $250,000, with a 20% down payment and have a 30-year mortgage. Depending on the interest rate you were able to lock in at the time of purchase—for our purposes let’s say it’s 5.00%—you may have a monthly mortgage payment for as little as $1,073 (not including taxes and fees).**

Whether you find that figure to be high or low, the good thing is that it is predictable. You will always pay the same amount every month as long as you have a fixed rate; the only thing that changes is the amount of principal vs. the amount of interest. For additional insight, take a look at an amortization schedule where you can precisely follow along the monthly breakdown over time between principal and interest.

When you are renter, your financial horizon only extends to the term of the lease (typically 12 months). After that, it’s anyone’s guess how much your rent could skyrocket. It leaves renters in a vulnerable state of not knowing how much money they will be paying down the road. When it comes to finances, predictability matters.

Useful tools to help you make your decision

Many adults harbor minor regrets about not taking advantage of all the museums and cultural offerings that their city, town or community may offer. The most popular excuse is “I just don’t have the time.” Well, now you do. Your staycation is a great opportunity to get off the couch and into the museum, planetarium, aquarium and so on.

The great thing is, many city and county museums regularly offer no-fee or reduced-fee days. This is all the more incentive to do your homework, wake up early, grab the kids and head over to your local museum for a dose of culture—and wonderment. Couple it with a nice takeout lunch at a local park afterwards and you have all the makings of a special summer staycation day.

While we hope this quick comparison has been helpful to those of you weighing the pros and cons of renting vs. buying, this is far from the only information source to help guide you in your journey.

Guaranteed Rate, for example, offers a great Rent or Buy Calculator as well as a host of other tools including a state-of-the-art mortgage calculator, that is fully customizable. We’ve looked at six areas in general terms, and buying a home came out as the preferred approach in four of them, but these tools can help you figure out the specific benefits for your unique situation.

Disclaimers:

* Guaranteed Rate Inc. does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation. ** Sample rate provided for illustration purposes only and is not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard. Guaranteed Rate, Inc. cannot predict where rates will be in the future

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