Rent vs. buy: What’s the difference?

Buying a home may be a part of the American Dream, but the costs may be too prohibitive for some. Considering housing is probably one of your biggest expenses, it makes sense that you’re wondering which is ultimately the most affordable option.

Neither option is better than the other, but there are choices that are better suited for your lifestyle and financial situation. It’s important to learn more about the nuances between buying and renting, and the difference between paying rent and a mortgage. That way you can understand which one is right for you.

Renting vs. buying: Key differences to consider

When you rent a home, you live in a property that’s owned by someone else in exchange for monthly payments. When you buy a home, you have more rights to the property since you’ll hold the legal title. Other key differences include the types of responsibilities you’re on the hook for and the type of financial commitment needed.

Equity

Buying a home means you’re paying toward property ownership. As you continue to make mortgage payments, you’ll build more equity. This is the amount of the home you own outright, and the time it takes to build equity will vary.

Having home equity can give you the opportunity to use it for wealth-building purposes. For example, you can decide to sell the home later on after it appreciates in value and then downsize to another home. That way, you can pocket the difference. You may also be able to borrow against the equity by using a cash out refinance, home equity loan, and a home equity line of credit (HELOC).

When you rent, you’re not building any equity or have any ownership stake. The payments you make go right to the landlord, who is the rightful owner.

Tax benefits

Unlike renters, homeowners can take advantage of several federal tax deductions and credits. For example, the IRS allows home buyers to deduct the cost of state and local real estate tax and up to a certain amount of their mortgage interest if they itemize their taxes.

Renters in some states may have renter's tax deductions and credits. California, for example, offers tax credits up to $60 for single filers and $120 for those filing jointly. In Colorado, renters who can meet certain requirements may be able to receive up to around $1,100 in tax rebates.

Flexibility

Both buying and renting a home offer some type of flexibility. The main difference has more to do with what you can do with the property.

Homeowners aren’t beholden to landlord rules, like how to treat the property or any modifications you can make. You have more freedom to renovate the home as you wish. However, if you want to move, you’ll need to sell the home, which can take weeks or months. The home selling process could cost you a significant amount once you account for real estate commissions and money to stage your home

Renting offers more flexibility when it comes to the ability to pick up and move elsewhere. You don’t need to worry about selling your home. Instead, you either wait until your lease is up or be willing to forgo your security deposit to move. You can decorate your rental home, but you won’t have much say if you want to make any permanent changes.

Maintenance and repairs

Owning a home presents more responsibilities when it comes to taking care of the property. You’re solely responsible for all repairs and maintenance, and these costs can add up.

Renters are responsible for keeping their space clean and well-maintained, but that’s limited to smaller items like switching lightbulbs and any dings on walls.

Financial commitment

Both types of living arrangements come with up-front costs. When it comes to renting, some of these costs include a security deposit, first month’s rent payment, renters insurance and advance payments for utilities.

For home buyers, the up-front costs tend to be much larger:

• Earnest money
• Down payment
• Closing costs
• Homeowners insurance

Other ongoing costs also include property taxes, higher utility bills, and potential mortgage insurance payments.

Rent or buy: Important factors to consider

Include a brief introduction to the main factors to consider when deciding whether to rent or buy. When deciding buy a home or rent instead, some main factors to include are location and your financial situation.

Your financial situation

You want to be able to afford whatever housing situation you prefer, so it’s crucial you carefully assess whether you have the means to do so. Look at your financial situations to see if you can afford the upfront and ongoing costs of owning a home versus renting.

Take the time to assess these key financial factors as well:

• Income: Your incomewill heavily influence how much of a mortgage or rent payment you can afford.
• Down payment: The amount you need to put down can be as low as 3% depending on the loan type when purchasing a home.
• Closing costs: This cost can be anywhere around 2% to 5% of your home’s purchase price
• Credit score: Your credit score can influence whether a landlord approves your rental application, or whether a lender will approve your mortgage.
• Property upkeep: Homeowners will need to maintain all parts of the home, whereas renters are responsible only for their unit.
• Debt-to-income ratio: Also called the DTI, the debt-to-income ratioassesses whether you have the means to take on a mortgage in addition to your existing debt.

Your location

Buying tends to be a more suitable option for those who are ready to settle more permanently in a specific location, whereas renting might make more sense for those in a temporary situation or those who are still exploring their location options.

Since buying a home feels more “permanent,” it may be best for those who are sure of the location they want, whether it’s being close to their work, living near loved ones, or having access to specific amenities that are suitable for raising a family.

Your preferences

Lifestyle considerations are as important as your finances. If you want to be able to decorate or renovate as you wish and not have to deal with a landlord, then buying may be a better choice.

But if you’re not interested in the responsibility of repair and maintenance, renting could be the way to go. Another consideration to keep in mind are homeowners association (HOA) rules. Depending on location, homeowners could have to pay HOA fees and abide by rules, whereas renters do not.

How to use a rent vs. buy calculator

The rent vs. buy calculator from Rocket Mortgage® can help you determine which option is more affordable and help you figure out a realistic budget.

To use the calculator, you'll need to provide the home purchase price, down payment amount, mortgage rate, and your credit score. It'll then give you a cost breakdown, how much equity you'll have so you can compare those costs against renting.

To make sure the figures are as accurate as possible, factor in additional costs like homeowners insurance, long-term maintenance costs and HOA fees.

The bottom line: Consider whether renting or buying fits your lifestyle and budget

Understanding the difference between renting and paying a mortgage will help you increase the chances of being able to afford whatever housing situation you want. It’ll also ensure that you’re happy with your day-to-day lifestyle, whether it’s avoiding a lot of maintenance, or being able to fully renovate a space.

Whatever your choice, carefully think through your financial situation and lifestyle preferences. If you’re ready to take the next step toward becoming a homeowner, you can start the mortgage preapproval process today.