While putting your name on a deed has certain advantages, it also creates added responsibilities. To make the best “rent vs. buy” decision for you, it's important to weigh the pros and cons of both sides.
The financial impact
When making a housing decision, it's tempting to simply look at the monthly cost of a mortgage versus rent. While that's certainly important, you'll also need to factor in how long you plan to stay at the property. Why? Because homeowners face significantly higher transaction costs than renters.
For example, you'll have to make a down payment (at least 20%, or else pay for private mortgage insurance [PMI] to cover the difference), which contributes to your equity in the home. But diligent buyers also face an array of other expenses—inspection costs, loan origination fees and more—that you don't get back. All told, closing costs can total 2%–5% of the purchase price.1
Once you move in, you may find yourself paying for renovations or repairs, which can range from very little to thousands of dollars a year. And once you sell, you often have to pay a sizable fee to your real estate agent.
What's more, reaching your “break-even” point—when your total monthly savings make up for all those transaction costs—can take longer than you might think. In 2019, Chris Herbert of Harvard's Joint Center for Housing Studies estimated that the average homebuyer would need to stay put for five to seven years to make the investment worthwhile.2
Rent vs. buy: A practical example
Let's say you're interested in buying a home for $300,000 and that your monthly cost (including your mortgage payment, property taxes, homeowners insurance and homeowner association [HOA] fees) is $1,600 a month. In this example, you'd pay $12,000 in upfront closing costs, so your grand total for the first three years of ownership would be $69,600. If you sold the place after that period, you'd also pay an agent around $18,000 in commission to help you do so. This means your transaction costs to live in and leave the home over three years total $87,600. And that doesn't include the potential costs of moving in—or out.
Now imagine that the owner is willing to rent you the same property for $2,000 a month, with a security deposit equaling one month's rent. On a monthly basis, that's considerably more than owning. But without those one-time transactions, and no move-out fees (other than what you might pay a moving company), living there for that same three-year period will cost just $74,000.
In this example, it will take a little more than six years to hit your break-even point—when the total savings on those lower monthly payments are enough to offset all the transaction costs associated with buying and selling. If you stay in the home for more than six years, it makes more financial sense to own than rent. But if your stay is shorter, the opposite holds true.