Rent Vs. Buy A House: Calculator And Decision Guide

When your dishwasher breaks down, who do you call: the plumber or your landlord? This situation demonstrates what happens when you rent versus buy a home. While renting can mean fewer expenses and obligations, homeownership gives you equity in return for your increased responsibility.

If you’re wondering if you should buy a house, it’s a good idea to weigh your options and evaluate your financial circumstances. Homeownership can give you stability and financial advantages, but renting is less expensive and gives you the freedom to move quickly. Let’s get into the details.

How Many People Rent Vs. Buy A House In The US?

According to the U.S. Census Bureau, 65.8% of Americans own a home in 2022. On the other hand, over one-third of households in the U.S. are rented. While more Americans buy homes versus rent, both homeownership rates and the number of renter households are, in fact, increasing. 

The Pros And Cons Of Renting Vs. Buying A House

Although homeownership typically represents the American dream, it comes with both costs and benefits to consider:

Pros Of Buying A House

• Ability to build equity, meaning you can borrow against the value of your home or sell it for a profit.
• Freedom to decorate how you like.
• Freedom to renovate or build additions to the home.
• Privacy from landlords or fellow tenants of an apartment building.
• Tax breaks from mortgage interest, real estate taxes, and more.
• Consistent monthly payments with fixed-rate mortgages.
• Property is an asset your heirs can inherit.
• Opportunity to build long-lasting relationships in your neighborhood.

Cons Of Buying A House

• Responsibility for repairs and maintenance. Whether it’s a clogged pipe or a broken furnace, it’s your job to fix it.
• Costs of homeownership (down payment, monthly mortgage payments, closing costs, property taxes, mortgage interest, etc.) can surpass renting.
• Costs of buying a house, such as the home inspection fee, appraisal fee, and loan origination fee, add up to thousands of dollars.  
• Risk of defaulting on your mortgage and foreclosure.

Pros Of Renting A House

• Fewer overall costs: the landlord is usually responsible for repairs
• Flexibility to relocate without needing to sell your home
• Less responsibility for maintenance 
• Renting is generally cheaper than owning a home in urban areas

Cons Of Renting A House

• Inability to build equity since you’re paying rent instead of a mortgage.
• Potential for monthly rent to increase due to economic trends or landlord preferences.
• Potential rules and restrictions. For example, you might not be able to decorate or modify the home or only be allowed one parking spot.
• Can be more expensive than buying in locations with affordable homes.
• Your landlord can sell the home and leave you in the lurch.

Factors Affecting Your Decision To Rent Vs. Buy A House

Before choosing between renting and buying, examining your circumstances can help you determine what’s best for you. The following factors will affect whether you’ll flourish as a homeowner or renter.

Length Of Occupancy

Your intended length of occupancy will help determine whether renting or buying a house is the right decision. For example, if you know you’ll only be living in your area for two or three more years, investing in a house is likely unwise.

The “5-year rule” or “5-year plan” states that homeowners should typically stay in their homes for at least 5 years before selling if they hope to make money rather than pay to leave. As a result, buying is better if you think you’ll be in the house for at least 5 years.

Location

The location of a house and the region’s real estate market can signify whether renting or buying is better for you. Specifically, becoming a homeowner is more realistic if you can afford an area’s cost of living and average housing prices.

When a seller puts their home on the market, appraisers derive the home value from nearby homes. Therefore, the house’s location determines the purchase price as well as other factors that affect the cost of homeownership, like property taxes and insurance.

Remember, city living can be as affordable as country living; location drives housing costs. You can use this guide of the most affordable big cities in the U.S. to see where you could live.

Financial Stability

A primary factor in purchasing a home is your financial situation. Owning a house can be more expensive than renting because of the additional expenses: property taxes, utilities, maintenance, repairs, insurance, and more. On the other hand, renting requires one monthly payment to your landlord, with no other obligations.

That said, living in an area with modest home values and building equity can mitigate the steeper cost of homeownership. Specifically, if you can find a home with a mortgage roughly equivalent to what you would pay to rent, you’re likely to come out ahead in the long run because of equity.

In addition, it’s wise to consider your credit score, debt-to-income ratio (DTI), and ability to make a down payment for a home. For example, a DTI of 43% or lower is recommended if you want to apply for a conventional mortgage. If you fall short in these areas, you might struggle to find a lender or an affordable mortgage.

Savings

Your savings account can be the pivotal factor between renting and owning. When buying a home, you’ll likely need to make a down payment ranging from 3% – 20% of the home value. If your down payment is less than 20% of the home price, you’ll have to pay private mortgage insurance (PMI), raising your closing costs and monthly expenses. PMI costs between 0.1% – 2% of your loan amount annually.

A smaller down payment means a larger mortgage loan, which increases your monthly payment. Therefore, your amount of savings influences your down payment and mortgage bill.

Remember, you’ll also have to pay closing costs on top of your down payment when buying a home. On average, closing costs are 3% – 6% of your loan amount. As a result, you’ll likely need tens of thousands of dollars in savings to buy a home.

For example, you might find a home that costs $250,000. Your minimum down payment is $7,500, but a payment of $50,000 can help you avoid PMI. In addition, your closing costs will be $7,500 to $15,000.

So, before buying a home, it’s recommended to save a considerable amount. The down payment and closing costs can be daunting, but you can use this guide on how to save for a house.

Credit Score

Your credit score is vital for renting and owning. Specifically, a credit score of 620 or higher is needed to obtain a conventional mortgage, while FHA mortgages grant loans to borrowers with credit scores of 580. While the minimum score will help you access mortgage loans, higher scores can qualify you for lower interest rates, decreasing your mortgage payment. As a result, you might need to work on your credit score for several months before applying for a mortgage to qualify or get one you can afford.

How To Use A Rent Vs. Buy Calculator

A rent versus buy calculator uses relevant information, such as your location, credit score, and current monthly rent, to show whether renting or buying is cheaper. To quickly analyze whether it would be financially wiser to rent or buy, use this Rent Vs. Buy Calculator. It shows if you’ll save money by renting instead of buying. Plus, you’ll see how home value appreciation and equity can make you wealthier over time as a homeowner.

On the other hand, you can calculate the total costs of renting and buying over a specific number of years without a rent versus buy calculator using estimations of homebuying costs and average rent in a given location. Researching rental and home prices in your area is a must, but you’ll also need to remember property taxes, insurance, and home upkeep costs for homeownership.

When Is It Smarter To Rent Or Buy A House?

Instead of being an eternal debate, renting versus buying is about context and your circumstances. Neither is a one-size-fits-all solution to housing. Your location and financial capabilities will clarify whether renting is better than buying.

Furthermore, your financial goals can help you decide how to move forward. For instance, you might be planning to start a family or move in a couple of years, and these factors are pertinent to your housing choice.

On the other hand, if you’re starting your career, renting might be smarter while you work towards your first promotion and build an excellent credit score. Then, several years down the line, your higher salary and credit score will help you acquire an affordable mortgage with a favorable interest rate.

Or, you might be in a big city where homeownership isn’t feasible for most, and you plan on moving to a small town in two years. In that case, renting is less expensive than buying, especially since you don’t intend to stay in the location for more than 5 years.

The Bottom Line: Weigh The Pros And Cons Of Renting Vs. Buying

Renting and buying give distinct advantages that benefit you depending on your circumstances. While buying gives you stability and equity, renting can be less expensive and give you more flexibility. Before renting or buying, consider your financial goals and the factors in this guide.

Remember, renting doesn’t mean throwing away money; it could be helpful while you build your savings and credit score or move somewhere new. On the other hand, if you want to stay in your community for more than five years and build equity, homeownership might be for you.

If you’re ready to buy a home, start the approval process with Rocket Mortgage® today.