Renting versus buying is a common crossroads many people face. Renting can feel a lot lower stakes as well as simpler and less expensive than buying a home. Homeownership provides security and wealth generation. Here we will dive into common questions home buyers are curious about.
Renting vs. buying a home
If you have the option financially to choose whether to rent or buy, we would generally recommend buying a home. When you run the numbers, buying a home that appreciates in value (i.e., you’re essentially earning the home value increases every year, which are much higher and more reliable than what you can earn with a small fraction of that money earning returns in something like the stock market). Typically, this value significantly exceeds the added costs of owning a home. And, through significant tax benefits that come from owning a home, the value of ownership can be much greater than anything you might be able to set aside while renting.
Here’s a simple chart to compare renting vs. buying a home:
| Factor | Buying a Home | Renting a Home |
|---|---|---|
| Equity Building | Pro: Builds equity over time with mortgage payments. | Con: Rent payments do not contribute to ownership. |
| Stability | Pro: Provides long-term stability with no rent increases. | Con: Subject to potential rent increases, moving more frequently and lease renewals. |
| Customization | Pro: Freedom to renovate and personalize the property. | Con: Limited ability to make changes or personalize. |
| Tax Benefits | Pro: Potential deductions for mortgage interest and property taxes. | Con: No tax benefits for renting. |
| Upfront Costs | Con: High upfront costs including down payment, closing costs, and other fees. | Pro: Lower upfront costs, typically just first month’s rent and a deposit. |
| Flexibility | Con: Less flexibility to move quickly due to the selling process. | Pro: Easier to relocate with lease term flexibility. |
| Maintenance Responsibility | Con: Responsible for repairs and upkeep of the property. | Pro: Landlord typically handles maintenance and repairs. |
| Market Risk | Con: Property values and local taxes can fluctuate. | Con: Renters may face rent increases reflecting property value changes. |
| Opportunity to Make Money from Increased Property Value | Pro: Potential for property value to increase over time. | Con: No financial gain from property appreciation. |
| Best For | Pro: Ideal for long-term stability, building wealth, and personalization. | Pro: Ideal for flexibility and lower upfront costs. |
Is renting cheaper than buying a home?
In many cities today, the cost of rent has gone up so much it is comparable to mortgage payments on homes in the area. Atlanta, and Miami are some cities where this can be the case. Other cities such as Houston and Detroit, have lower housing costs in general.
Major cities such as New York and San Francisco have housing prices so high that renting is indeed a cheaper option if you want to be in the heart of the city.
Renting may have less upfront costs than buying a home, and you can avoid closing costs and things like property taxes and homeowners insurance.
What percentage of income should go to rent or a monthly mortgage payment?
Most financial professionals will tell you to cap your monthly mortgage payment at 30% of your gross monthly income. Of course, who really pays attention to their gross monthly income (that’s the pre-tax portion of your paycheck)? And depending on where you live, that might not be realistic either (e.g., in a city like New York, it’s more common to have 50% of your income going to rent).
But the lower your living expenses the more you can save (building longer-term financial security), paying off debts, and covering other necessities like groceries and any fun spending you want to factor in, such as a gym membership or dinners out.
So, if you make $80,000 a year, you’d want to cap your monthly payments around $2,000. With a 6.5% interest rate and an 8% down payment, you’re probably looking at a home price of around $250,000. This estimate also factors in property taxes and insurance.
If you’re buying with a partner or a friend and can pool your incomes, your budget could increase significantly. For example, if both you and your partner make $80,000, giving you a household income of $160,000, you’d be looking at an affordable monthly payment of $4,000. Using the same factors—6.5% interest rate and an 8% down payment—you’d be looking at homes in the $500,000 range.
And remember, the more you put down for your down payment, the lower your monthly payment will be, potentially increasing your budget as well.
What are the pros and cons of buying a home with a friend?
With housing costs soaring, more people are teaming up to buy homes because going solo is often too pricey in today’s market. Pooling your incomes can help you qualify for a larger mortgage and afford a better home. Plus, you’ll start building equity instead of paying rent and sharing responsibilities can make homeownership more manageable.
There are risks to consider. Your friend’s financial situation could impact your mortgage approval and interest rates. If they miss payments, it might hurt both your credit scores, and financial strain could stress your friendship. Selling or moving out can be tricky, and co-ownership needs clear agreements on finances and decisions. Most people keep a mortgage for at least 8 years, which is about the time it takes to see meaningful returns (and not lose the upfront costs of closing and moving if you decide to move). So, you might not need to make it 30 years to make it work.
If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.