Buying Vs. Renting: Costs to Consider
Should you buy a home or keep renting? Across the nation, people of all ages struggle with these questions. When it comes to buying versus renting, multiple costs must be compared and considered. The three types of costs that should be compared when considering whether to buy or rent are the money needed upfront, the ongoing or recurring costs, and random expenses that come up.
Home Buying: Upfront Costs
The most obvious upfront cost when buying a home is the down payment. Bankrate reports that on average, mortgage lenders require at least a down payment of 3 percent of the home's price. However, "FHA loans (mortgages insured by the Federal Housing Administration) require a down payment of at least 3.5 percent."
Before home shopping, it's important to determine with a mortgage lender how much prospective buyers will be able to finance, and pre-approval can make the difference with some sellers. How much a home buyer need for a down payment will depend on a variety of factors, including credit rating. Other upfront costs for home buying include but may not be limited to:
- Ernest money: Paid when you make an offer to show the seller you're serious. This money then may be added to the down payment after the offer is accepted.
- Home appraisal and inspection: Both average about $300 to $500 each.
- Closing Costs: These are various line item fees paid at the time of closing; estimate these to be about 2 to 4 percent of the purchase price.
- Property taxes: Amount will vary depending on the state tax rate and your closing date.
- Home insurance: Mortgage lenders won't issue a loan without up-to-date insurance on the property.
As a renter, upfront costs are significantly different. Typically, when renting a home or apartment, renters are expected to pay a security deposit upon signing the rental lease. Depending on the lease agreement, renters may also be required to pay the first and last month's rent upfront. In addition, you're not required to purchase renter's insurance, but it's highly recommended.
Both home buyers and those who opt to rent usually share one common monthly expense. For the homeowner, it's the mortgage, and the renter must pay their rent. The difference is that the homeowner is building equity with each mortgage payment. Home equity is the part of a property that you truly own. "Home equity is typically a homeowner’s most valuable asset," according to an article by The Balance. Every time you make a mortgage payment and work towards paying off the principle, you build more equity. That equity then may be used to buy another house later in life.
Buying a home also means owners have to pay property taxes each year, an expense that's not required of a renter. For home buyers, owner's insurance may be a monthly bill or something that's paid every six months or once a year. On average, renter's insurance cost less monthly than home owner's insurance.
Utilities are a recurring cost for homeowners, while some rental agreements may include utilities in the monthly rent. A Las Vegas home buyer also should budget for landscaping if they're not performing these chores personally.
Random or Hidden Costs
Any home owner will tell you that there's always random or hidden costs with a owning a property. The air conditioner stops working on a 90-degree day or a storm forces a branch into a window, cracking the glass. For a renter, these inconveniences would be handled by the landlord without the renter incurring any expense.
Both first-time home buyers and new renters may have the expenses of purchases furniture to fit their new living spaces. When buying a home, you also may need to purchase appliances, including a washer and dryer. If the renter doesn't have a washer and dryer in their unit, it's likely you'll have to pay to use the laundry facilities in the building.
These are just several of the most common and major costs to consider when debating between buying versus renting. While you may have more upfront costs with buying a home, the benefits often outweigh the negatives. You'll own your own property, build equity, and have a chance to make your home buying dream come true.
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