Contrary to what you might have heard, it’s not always better to buy a home than rent one. Yes, building equity in a home and watching it rise in value is one of the best financial moves you can make. But home values don’t always go up — and if you’re stuck in a mortgage you can’t afford, it can lead to a downward spiral of problems that might put you in a deep financial hole.
Right now, those mortgages are very expensive. Mortgage rates have more than doubled in recent years to about 7.5% — their highest point in more than two decades, according to the St. Louis Fed — while average home prices continue to hover near all-time highs.
Jessica Lautz, deputy chief economist at the National Association of Realtors, recently noted the typical monthly loan payment on a median-priced home of $413,500 would be $2,270, based on a mortgage rate of 7.31%. For a newly built median-priced home of $430,300, the monthly mortgage payment would be $2,362.
Rents aren’t exactly cheap, either. The median national rent price stood at $2,052 a month in August 2023, according to Rent.com — only slightly less than the record monthly price of $2,054 set a year earlier.
Given the high price of housing these days, it’s more important than ever to determine whether you are better off buying or renting. Here are five things to consider:
The amount of money you have saved up for a down payment can play a major part in whether to buy or rent a home. Ideally, you will have enough saved up to put 20% down on a new home. Paying 20% down can benefit you in multiple ways, such as reducing the mortgage loan’s interest rate, lowering the cost of monthly mortgage payments and eliminating the need for private mortgage insurance. If you need to scramble to put as little as 5% down, then you should probably rent rather than buy.
The 30% Rule
In case you aren’t familiar with this rule, it basically means that housing costs should never take up more than 30% of your household income. For example, if your household income is $5,000 a month, then you should spend no more than $1,500 a month on housing. That’s a tough ask these days, with housing prices so high. When deciding on whether to buy or rent a home, research your local market to find out which option makes it easier to stick to the 30% rule based on your income and budget.
Although average mortgage rates are high, they aren’t the same for everyone. Buyers with high credit scores will get better terms from lenders, meaning they can probably get a loan well below the average rates. In contrast, those with low credit scores will likely pay much higher than the average rate. If your FICO score is below 670 – meaning it is no better than “fair” – then you probably won’t get good loan terms and are better off renting until your score goes up.
Local Market Conditions
Some markets are more suited to buyers than renters, and vice versa. For example, cities in and around California’s Silicon Valley rank among the most expensive to buy a home, CBS News reported. San Jose is the city where it’s most expensive to buy vs. rent, with the typical home payment 165% higher than the typical rent payment, according to Redfin. The median estimated monthly mortgage payment for homebuyers in San Jose is more than $11,000 vs. the median monthly rent of about $4,200.
That’s a huge difference. If your budget doesn’t allow for a big monthly mortgage payment, then you are better off renting and putting whatever money you save into a fund for a future down payment.
Where you work can play a big role in determining whether you should buy or rent a home. If you are among the rising number of Americans who can work remotely — and don’t need to be near your employer — then it might make sense to find a place where homes are affordable and you can begin building equity in a new home. But if you have to commute to work every day, you’ll need to consider whether renting or owning is the better option based on local prices and your budget.
Even if you work on-site now, consider whether your employer will offer more remote opportunities in the future. As of July 2023, 12.7% of full-time employees in the U.S. worked from home, Forbes reported. That percentage is expected to rise to 22% by 2025. If you think you’ll be able to work remotely in the next few years, it might be better to keep renting until a remote work opportunity lets you buy a home in a more affordable market.