Fall 2017 Edition

Rent vs. own: Questions to ask before you decide

Perhaps you’re thinking about buying your first home. Or you’re nearing retirement and contemplating downsizing (or even upsizing) from the home you own. Before you make the big decision, weigh whether it’s the right financial move for you.

Climbing on—or off—the property ladder is a big decision. Your choice is going to depend on a number of personal factors: Your job situation, family priorities, location, accumulated savings, interest rates, and projected resale values. Not to mention all the emotional attachments most of us have with that place we call home.

Home sales—still climbing?

While sales of existing homes increased by 3.8% during 2016 to their highest level since 2006, growth is expected to slow a bit this year due to anticipated higher interest rates—about 4.5% for a 30-year mortgage. That said, brisk sales early in 2017 are a sign that buyers may not be put off by potential rate increases.1

How do you weigh all the variables and come up with the choice that’s best for you? It’s not easy, but breaking the process down by crunching the numbers and then asking yourself a few key questions about your lifestyle can help you figure it out.

Crunch the numbers

Rent vs. Buy Calculator

Use the Rent vs. Buy Calculator from AARP to get a rough idea of how long it might take for you to break even on buying versus renting.

  • Calculate your savings – To purchase a home, you’ll need to make a down payment—typically between 5% and 20% of the sale price in cash for a conventional mortgage.2
  • Review your credit score – To get a favorable mortgage, you generally have to have a high credit score, steady income and stable job. If you need time to build (or rebuild) good credit, renting might be a better option for the time being. Haven’t checked your score in a while? Federal law allows you to get a free copy of your credit report every 12 months.
  • Weigh the financial pros and cons – The main benefit of buying a home is the potential for building up equity as you pay down your mortgage. In addition, your home could grow in value over the years. And most homeowners can deduct mortgage interest on their income taxes. The drawbacks? Like the stock market, the real estate market can fluctuate dramatically and there is no guarantee you’ll turn a profit when you’re ready to sell.
  • Consider the costs – Owning a home comes with many obvious (and not-so-obvious) costs. In addition to real estate taxes, factor in mortgage insurance, utilities, general maintenance and repairs, and possibly even waste removal. If you decide to rent, the math is much simpler and your costs are generally more predictable—even though your rent will likely rise a bit every year. Whether those costs are offset by the financial advantages of home ownership is something you’ll need to calculate on a case-by-case basis.
  • Factor in your freedom – One of the main benefits of renting is your ability to pack up and move with no obligations when your lease ends. Plus, without your money tied up in housing costs, you may have more cash to spend, save and invest. But this freedom comes with a price: By not owning real estate, you won’t get the tax breaks or the potential to build equity.

Assess your lifestyle

Even if owning a home seems to make sense financially for you, remember that it comes with a number of commitments. Not all of them may fit the way you want to live. Ask yourself these questions:

Three best cities for first-time homebuyers

Based on stable housing markets, affordability, and the availability of conventional mortgage loans, these cities rank as the top three markets for first-time homebuyers3:

#1 Pittsburgh, PA

#2 Oklahoma City, OK

#3 Omaha, NE

Am I handy?

With homeownership comes a succession of tasks, often small, that can range from waterproofing the deck and cleaning the gutters to fixing a leaky faucet or replacing a door handle. And that’s not even taking into account routine maintenance like lawn care. If you rent, the headaches of home maintenance belong to someone else. If you’re a homeowner, it really helps to be good at repairing things, so you can tackle these chores yourself at relatively little cost. Otherwise, you’d better build a line item into your budget for a handyman.

Am I comfortable staying put?

Because there are so many upfront costs, buying a home and then moving a short time later may not be worth your while. If you’re offered a career-enhancing job in another part of the country, the hassle of selling your old home and buying a new one could be a real barrier to moving. Or maybe you like the idea of being able to pick up and move across the country. Either way, make sure you’re going to be around for a while if you plan to buy a home.

Do I foresee any major changes to my lifestyle?

The number of people under your roof can change—whether it’s by getting married, starting a family, bringing in a parent, or some other life-changing move. At the same time, you could be anticipating a big expense or a windfall at some point in the future. If you believe that an upheaval in your life is likely, this might not be the best time to commit to a house.

Decision time: Rent or own, it’s your call

From a financial standpoint, the decision that suits you best depends on what’s happening in the present and likely to happen in your future, your current living arrangements, and the location and kind of house you’d like to live in. But ultimately, as with many important decisions in life, deciding whether to buy or rent is a personal choice.

If you prefer a comparatively stress-free lifestyle, then renting may be the best option. You won’t have massive debt hanging over your head, and you may have more money to save for travel and other expenses, or to invest for retirement and other goals that are important to you. However, you might place more importance on stability and a sense of comfort and community. If that’s the case, then buying may be the right decision. Just be sure that you’ve taken all the important factors into account before you make the call.  

1 Source: National Association of REALTORS®, February 2017.

2 Source: BankofAmerica.com, “Budgeting for a home: How much should you put down?”, referenced May 2017.

3 Source: SmartAsset.com, “The Best Cities for First-Time Homebuyers in 2017” study, April 2017.

Neither Merrill Lynch nor any of its affiliates or financial advisors provides legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.