What You’ll Learn
How to compare the affordability of renting and buying
What you’re paying for as a renter and a homeowner
When it might be time buy and when it might be time to rent
So you’ve been renting for a while and you’re wondering if you’re ready to become a homeowner. You’ve probably daydreamed about all the fun stuff that comes with owning a home: enjoying more space, getting the chance to earn equity in a long-term financial investment, and not having to ask permission to paint an accent wall. But renting also offers great advantages, like having the freedom to move after a year, letting your landlord handle repairs or renovations, and never worrying about pesky property taxes or flood insurance. So how do you decide? It ultimately depends on your financial situation and personal goals.
How to decide if you should rent or buy
Buying a house comes with a much bigger price tag than renting an apartment, so it probably seems more affordable to rent, right? It’s a little more complicated than that. Yes, there are bigger upfront and ancillary costs associated with owning a home, but there are also major financial benefits and lifestyle perks that offer value. While Better Mortgage's affordability calculator is a great jumping off point for figuring out your homebuying budget, let’s also take a closer look at some other factors that impact the true cost of homebuying versus renting.
How to compare the cost of renting and buying
Comparing the affordability of renting and buying can feel like apples and oranges at first. Rather than looking at the total cost of a home, which can be hundreds of thousands of dollars, think about the portion of your income that goes toward paying your housing expenses on a recurring basis. The smaller the percentage of your income you spend to live somewhere (whether it’s a rent payment or a mortgage payment), the more affordable it is. The monthly cost of renting is pretty straightforward, but the monthly cost of owning a home depends on your loan amount, interest rate, the type of loan you get, and other factors.
When you apply for a mortgage, lenders evaluate a handful of key financial data points: things like your credit score and your debt-to-income ratio (DTI) play a major role in determining the interest rate you qualify for and the amount you can borrow. Getting pre-approved is the best way to see which options are available to you. Once you know how much a lender might be willing to lend you, you can reverse engineer to figure out what kinds of homes are in your price range and compare the monthly cost of different loan terms more accurately. For example, buying a $250,000 house with a 15-year adjustable rate mortgage will yield very different monthly payments than a fixed-rate 30-year mortgage.
You should also consider how your housing strategy factors into planning and working toward long-term lifestyle goals. Here are some common scenarios and priorities that people encounter in this process, and a breakdown on how buying or renting impacts each:
I want to spend less money upfront
If your top priority is short-term savings, renting might seem more feasible. There are higher upfront costs associated with buying a home, with the down payment typically being the biggest expense. However, down payments are no longer as prohibitive as they used to be (the days of the 20% minimum are long behind us) and borrowers can put down as little as 3% with certain loan types. That said, the size of your down payment does impact the cost of your monthly mortgage payment—a bigger down payment reduces the principal amount of the loan and the recurring monthly cost of your mortgage payments. Renting will require a smaller cash outlay of the two options (most landlords only require a 1-month deposit that typically gets returned at the end of your lease) but upfront costs of buying a home can be less expensive than you might think.
I want someone else to deal with upkeep
On top of monthly payments toward your mortgage, homeowners are also responsible for maintenance and repairs. If a pipe bursts or a tree limb falls on the roof, you’ll be the one eating that cost. As a renter, you make monthly payments to a landlord and you’re not required to cover any additional expenses besides utilities. If your top priority is convenience and minimizing emergency expenditures, renting might be for you.
I want more flexibility to move around
You’re a free spirit! We salute you. While renters do tend to enjoy more mobility, homeownership doesn’t have to be permanent. If you’re interested in buying but aren’t ready for a forever home, you might want to consider properties that have a reasonable break-even point. Depending on the market, homes typically appreciate 3-5% in value per year. With that in mind, it’s not unreasonable to plan on buying a home, living there for a few years, then selling it for a profit if you wanted to pursue a job opportunity elsewhere or just explore a new city. You’d need to make enough in the sale to recoup one-time fees like closing costs and moving expenses, depending on the market, investing in property can be financially beneficial in the short-term.
I want stable housing costs
In some places, rent payments can be as high or higher than monthly mortgage payments; the amount you pay can also increase each year depending on the landlord. If you get a fixed-rate mortgage, you don’t have to worry about that monthly number fluctuating. For some people, the consistent payments of homeownership may be preferable to potential rent hikes.
I want to build more wealth
There are more upfront costs associated with buying a home, no question. But there are also more long-term financial opportunities. Every check you send to a landlord is money that you’ll never see again; you’re not building wealth as a renter. While this isn’t necessarily a bad thing (after all, you’re paying for the luxury of less commitment and more flexibility) homeowners do have the advantage of earning equity as they pay down the principal on their loan and their property appreciates in value. Equity is the difference between the market value of your house and the outstanding balance on your mortgage. Essentially, it’s the money you’ve paid into your home—which is the largest financial asset many people will ever own.
I want fewer ancillary costs
As a renter, you are only responsible for covering the cost of rent and utilities. As a homeowner, you’re responsible for ancillary costs like property taxes, homeowner’s insurance, maintenance expenses, as well as potential mortgage insurance and HOA fees. These recurring costs can vary dramatically depending on the location and condition of your home, and have a significant impact on the affordability of your monthly mortgage payment. Having said that, you can easily shop for homes that fit your budget and find a total monthly mortgage payment that works for you. By understanding the hidden costs of homeownership and working with a lender that doesn’t charge hidden fees, you’ll be able to get more for your money.
I want to start a family
Many people see starting a family as a great reason to buy a house. Being a homeowner can help you put down roots in a community and give you access to competitive schools, public parks, and other local perks—but it comes at a price. Property taxes fluctuate depending on where you live and what kinds of local amenities you have access to. Make sure you understand how the cost of living in a certain area will impact the overall cost of your mortgage before you commit.
Should I keep renting or am I ready to buy a house?
Whether you’re a renter or a homeowner, you have a monthly housing budget—deciding how to get the best value for your money ultimately comes down to your financial goals and personal priorities. While renting may offer some short-term benefits like fewer upfront costs and flexibility to change locations, buying a home is typically going to give you more financial opportunity, payment stability, and the chance to put down roots in a community. At Better Mortgage, we’ve eliminated fees and offer diverse loan types that fit a variety of budgets. If you’re interested in seeing how much home you can afford, get pre-approved in as little as 3 minutes.