Should You Rent or Buy Your Next Home?
6 Min Read | Last updated: August 9, 2024
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Deciding whether to rent or buy a home is a big decision. Crunching the financial numbers is important, but so too is a clear-eyed sense of what fits your life best.
At-A-Glance
- Buying a home can make sense if you’re ready to settle down and are up for all the financial responsibility that comes with home ownership.
- Think you might want (or need) to move to another part of the state, or country, in the next five years or so? Renting might be the better choice — for now.
- Some good news: Few lenders nowadays expect you to make a 20% down payment or have an 800+ credit score. So to help set yourself up for success, it’s a good idea to understand what mortgage lenders look for.
Making the move from renter to homeowner — a traditional component of the American Dream — seems to be undergoing a bit of a rethink. Rising home prices, changes in lending hoops to qualify for a mortgage, and the scaling back of a big tax break for many homeowners are altering the equation for people pondering the question: Should I rent or buy a home?
If you’re wrestling with that big-ticket question, carefully weighing key personal and financial variables is just as important as reading the housing market tea leaves on whether now is a good time to buy.
Renting vs. Buying a Home: Personal Considerations
Before you crunch any numbers, take the time to think through the best fit for you at this stage of your life. These questions can help:
- Do you want to own a home? Are you comfortable with the financial responsibility that comes with owning? When you pay rent, the rent you pay likely covers the landlord’s property tax and insurance costs. But as an owner, you become 100% on the hook for those expenses — and increases — and it’s on you to handle all the maintenance costs.1,2 Owning can be a good investment, but convincing yourself to buy for financial reasons when you’re not really comfortable with all the responsibility involved may not align with your long-term financial goals.2
- What does your five-year career path look like? Any chance you might want to relocate in the near future for work, or perhaps for a new adventure? That makes buying a home a bit riskier. Over the long term (usually decades), home values tend to appreciate with inflation, though several factors affect both inflation and home prices.3 But over short periods, there’s no guarantee that selling prices will be higher, meaning you could come out behind. The longer you intend to stay put, the more it can make sense to consider buying rather than renting.
- How hungry are you for stability? One clear advantage of owning a home is that you can lock in a steady mortgage payment, whereas rents are more likely to increase frequently.2,4 But keep in mind that it’s only the base mortgage that won’t budge. Your property tax, homeowner insurance, and all the upkeep costs may rise over the years.5,6
Renting vs. Buying a Home: Financial Considerations
The financial hoops you need to jump through to qualify for a mortgage may not be as high as you think. Here are three main ones:
- Can you scratch together a down payment of around 3.5%? Lower than you thought? This is not your grandparents’ mortgage world. Back then, it was common for banks to require homebuyers to come to the table with cash equal to 20% of the home price. Nowadays, you don’t always need to make a 20% down payment. In fact, it’s possible to qualify for a mortgage with a down payment of just 3.5%. But the low barrier to homeownership comes at a price, such as private mortgage insurance (PMI), higher monthly payments, and higher interest rates.7,8 For a deeper dive, read “How Much of a Down Payment Do You Need to Buy a House?”
- Have a good credit score? To land a mortgage, lenders are going to check your credit scores. The minimum credit score required for a conventional mortgage is 620, according to Fannie Mae and Freddie Mac, two federally-backed mortgage companies.9,10 But the higher your credit score, the more likely you’ll be able to qualify for a loan, and be offered a lower interest rate. To learn more about boosting your score, read “6 Ways to Help Build Your Credit.”
- Got a DTI of 35% to 40% or so? Whenever you apply for a loan, lenders will typically examine how much of your monthly gross income is needed to cover all your debt payments, including student loans, car loans, and the mortgage you’re applying for. This calculation is called your debt-to-income ratio (DTI). As a general rule, a DTI of 35% or so is going to make a lender happy, though it’s also possible to get a mortgage with a DTI of more than 40%.11 Keep in mind that lenders are going to look at your entire financial picture. For instance, if you are making a 5% down payment, your lender might be pretty strict about needing your DTI to clock in around 35%. But if you’re making a down payment of 10% to 15% or more, you might get by with a higher DTI.12
Renting vs. Buying a Home: Tax Considerations
Here are three key tax questions to consider when deciding whether to rent or buy:
- Do you expect to borrow more than $750,000? The interest you pay on your mortgage can be claimed as an itemized deduction on your federal tax return only if the mortgage is for no more than $750,000 (or $375,000 if you are married and you and your spouse file separately).13
- Can you handle the property tax? Before 2018, homeowners could claim 100% of their property tax payments and state income tax as a deduction on their federal tax return.14 Now, every tax return (whether for an individual or a married couple filing a joint tax return) can claim only a combined maximum of $10,000 for property tax and state income tax as a deduction on their federal tax return ($5,000 for individuals married but filing separately).13 Pull up your most recent tax return; if you are already at the $10,000 max, you won’t be able to get any federal tax break on your local property tax.
- Are you going to itemize deductions? To claim the mortgage interest deduction and the $10,000 maximum deduction for state and local income and property tax, you must file an itemized federal tax return. Compare this to the standard deduction. If the standard deduction is more than your combined, itemized deductions, itemizing doesn’t make sense.
For more, read “7 Top Tax Deductions for Homeowners.”
The Takeaway
Weighing the big question of whether to rent or buy a home? Before you crunch the numbers, take the time to think through what might be the best fit for you at this stage of your life.
1 “Should you rent or buy? Before you decide, ask yourself some questions,” Fortune Recommends
2 “Is It Better to Own a Home or Rent?,” Experian
3 “How Higher Mortgage Rates Have Historically Affected Home Prices,” Urban Institute
4 “With mortgage rates remaining high, renting is less expensive than buying,” CNBC
5 “US Homeowners See Biggest Property Tax Rise in Five Years,” Bloomberg
6 “Feeling the pinch of high home insurance rates? It's not getting better anytime soon,” NPR
7 “Most Home Buyers Aren't Putting 20% Down for a House,” U.S. News and World Report
8 “What is private mortgage insurance?,” Consumer Financial Protection Bureau
9 “What Are Fannie Mae and Freddie Mac?,” U.S. News and World Report
10 “Nearly 4% of Mortgage Volume Goes to Sub-620-Credit Borrowers. How To Qualify With Lower Credit,” Mortgage Research Center
11 “What Is Debt-to-Income Ratio (DTI) and Why Does It Matter?,” Experian
12 “What Is a Good Debt-To-Income Ratio For a Mortgage?,” Money
13 “Topic no. 505, Interest expense,” Internal Revenue Service
14 “How did the Tax Cuts and Jobs Act change personal taxes?,” Tax Policy Center
Carla Fried is a freelance journalist who has spent her entire career specializing in personal finance. Her work has appeared in The New York Times, Money, CNBC.com, and Consumer Reports, among other media outlets.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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