Rent or Buy – What’s the Difference

There are two basic options you have when planning to live independently: rent an apartment or house owned by someone else or buy a home for yourself. There are advantages and disadvantages to both renting and buying.

Commitment

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Renting a property is a short-term commitment; you can move once your lease is up if you don’t like the unit or location. Renting is good if you are not sure a neighborhood is where you want to be for a long time or will meet your needs.	Buying a property is a long-term commitment and can be a home for a very long time; it is a more stable living situation. Buying is good if you have roots in the neighborhood and are sure the location meets your needs.

Terms

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Month-to-month Some landlords allow tenants to rent a unit without a time commitment. You can decide to move at any time without penalty. There will be a contract describing the rent, rules, and responsibilities of the landlord and tenant. Lease Some landlords only rent a unit with a time commitment, typically one year. The lease is a legal contract which says something like: “At the end of the year, you can move without penalty or renew the lease for another year.” You may be subject to rent increases every time your lease is up for renewal.

Mortgage loan If you don’t have enough cash up front, you will need a loan in order to purchase a home. This is called a mortgage. You make a promise to the lender to repay the loan, with interest, during the course of 15 or 30 years. If you don’t make your loan payments, the lender can sell the property to repay the loan. Monthly payments for housing can be relatively stable over the long term with a fixed rate mortgage loan. Property taxes and insurance may be included in the loan payment but those costs will increase over time.

Regardless of whether you have a lease or rent from month-to-month, if you don’t make your rent payments you will be evicted or removed from the unit.

Up-Front Costs

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Security deposit Usually an amount of 1-2 month’s rent, this money will be kept by the landlord if there is damage to the unit when you move out or if you break the terms of the lease.	Down payment Depending upon the loan program, you can expect to pay 3.5% – 20% of the purchase price for a down payment. Closing costs Typically 6-8% of the loan amount, these costs include the loan application, property inspection, real estate taxes, homeowner’s insurance, etc., and other expenses required to purchase property.

Responsibilities

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The landlord is responsible for repairs, shoveling snow, lawn maintenance, replacing appliances, etc. The landlord will expect you to be a good tenant by keeping the unit clean, respecting the common areas, and following the terms of the lease.	You are responsible for any repairs, shoveling snow, lawn maintenance, replacing appliances, etc. It is wise to keep your home clean and in good repair to protect the investment that you are making and ensure the property retains its value.

Making It “Home”

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You will be limited in how you can personalize a rental unit. Any changes such as paint colors/wallpaper, carpet, etc., will need to be approved by the landlord. This includes home modifications needed for accessibility. You will have to pay for any changes and may have to return the unit to its original form when moving out. (See What I Need – Accessibility for more information.)

Your only limitations to personalizing a home you own are local township/city codes, your money, and possibly Homeowner’s Association rules (learn more about Homeowner’s Association fees and other Housing Expenses). You can paint the walls any color, change the carpet, and remodel the kitchen any way you want. You will have to pay for any changes you want to make, and home improvements, repairs, and accessibility modifications can be substantial. For example, it is not unusual for a new roof to cost $5,000 or more for a small house.*

Other Considerations

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Buy

You do not own the property and will not build equity by paying rent. Leasing does not require the physical and financial commitment of buying. Renting is a great first step in living independently. If your landlord reports rent payments, you will have the opportunity to build positive credit.

With every mortgage loan payment, you are building equity. Equity is the value of an asset (your home), minus what you owe on any loans (mortgage) connected to it. Buying a home is the largest financial transaction that most people will make in their lives. It is an ongoing commitment that should be considered carefully before deciding to buy. Every on-time mortgage payment you make will have a positive impact on your credit.