Home is where the heart is. And when it comes to renting versus buying, your housing situation can make a big difference in your financial wellness and overall happiness.
Purchasing a home is widely considered a wise long-term investment in an asset that’s likely to appreciate over time. But the reality is that less than half of millennials own homes.1 There are many factors—like affordability (the typical American home price has climbed to more than $272,0002), levels of debt, and shifting priorities—that go into why fewer millennials own houses than previous generations.
For many, renting is seen as a better solution—one that can allow you to save money, have fewer responsibilities, and enjoy more freedom or flexibility. And while experts still suggest homeownership should be a goal in your journey toward financial confidence, renting shouldn’t be seen as a waste—it might be what’s right for you right now.
3 scenarios when renting makes financial sense
1. You can’t afford a home just yet
A lot of money goes into homeownership, even beyond the monthly mortgage payment. Homeowners association (HOA) fees, utilities, and more can add up quickly. And when you own a home, the cost of any repairs falls on you. If you underestimate those expenses when you buy a house, you could own property but struggle to keep up financially. This can make it harder to work toward other financial goals such as paying off consumer debt, saving for retirement, or investing.
Financial researcher Isaac Tabner has argued that many buyers overlook hidden costs associated with homeownership, such as insurance and maintenance.
“It is often thought that buying a house makes more financial sense in the long run,” Tabner said in a 2017 University of Stirling news article.3 But, he goes on to say, renting may be a better bet for people who don’t have a high income or who plan to move within the next few years.
Homeownership isn’t for everyone. According to Brian Ford, head of financial wellness at Truist, you should ask yourself these questions4 to determine if you’re financially and mentally ready to buy a house:
- Will you live in the home for at least three to four years?
- Is your credit score high enough to get a competitive interest rate?
- Can you easily afford the total monthly payment in addition to any other debts you may have?
- In addition to your monthly principal and interest payment, have you factored in the cost of insurance, utilities, maintenance, private mortgage insurance (PMI), and any HOA fees?
- Are you confident that your job and current income are stable?
- If you lost your job, could you continue to make your mortgage payment for a minimum of three to four months?
- Do you have at least 10% of the total cost of the home saved for a down payment?
- Besides money for the down payment, do you have additional funds to cover the closing costs, which you pay at the time of purchase?
- Are you free of consumer debt?
If you answered “no” to any of these questions, renting may be the best route for you right now. And that’s nothing to be ashamed of—you’ll be better off renting than jumping into the significant responsibilities of homeownership before you’re ready.
2. You’re focusing on other financial goals
If you’ve been reading our tips, you’ve probably already heard us talk about the importance of setting up an emergency fund—which Ford says is the first step toward financial confidence. Without emergency savings to fall back on, you’ll lack the security and assurance you need to make other money moves. Aim to have enough to cover three to six months’ worth of living expenses.
Even with a proper emergency fund in place, you may have other goals you want to achieve before buying a house. Paying off debt—even if it’s “good debt” like student loans—is a common goal, and it can be a significant hurdle to overcome in your journey toward homeownership. Depending on your values and priorities, you may also simply want to focus on other things, like saving for experiences and travel.
3. You’re not ready to settle down
Maybe the idea of being a homeowner doesn’t excite you at all—especially if you consider yourself more of a free-spirited, go-wherever-the-wind-takes-you sort of person. If you don’t want to be tied down to one place for long—or simply aren’t ready to take on the responsibility of homeownership—renting can make it easier to live according to your values, which could help you increase your happiness and boost your mental well-being.
Ford shares this financial advice if you opt to rent rather than buy a home:
“If your values point you in the direction of renting, just know you are giving up on building your net worth for following those values. Picture yourself 10 years from now. If you realize your friends who bought homes have built up anywhere from 100 to 200 grand in equity, will you be OK with that?”
So if you plan to rent long-term, Ford suggests coming up with a savings plan and investing so you can continue building your net worth. The longer you rent, the more you should consider increasing your savings as a way to build wealth and financial confidence.
Opening the door to homeownership
If you’re excited by the thought of owning a home, it’s probably a sign you’re mentally ready to buy a house. But make sure your financial situation backs up your mental readiness.
Bright Dickson, co-host of “Money and Mindset With Bright and Brian,” shared her thoughts on steps to take before buying a home: “Talking to people who are homeowners about their experience is probably a really good way to go. Choose people whose lifestyle is similar to yours, because they’re going to be able to tell you what they’ve encountered. That can help you decide if you’re ready or not.”
While a 2018 survey found the median down payment for first-time homebuyers was about 7%,5 Ford’s advice is to have at least 10% saved for a down payment. He even prefers a more traditional 20% down payment, which is the minimum required to avoid paying private mortgage insurance—an extra monthly cost that would otherwise be tacked onto your mortgage. Ford also recommends not buying unless your job is stable and your emergency fund is healthy. And if your credit score isn’t stellar, look for ways to improve that, too, which can help you get a lower mortgage interest rate.
Read more: Your credit score, explained (infographic)
When your money habits match up with your mindset, you’ll know that regardless of whether you’re a renter or a homeowner, you’re doing what’s right for you. There are many ways to build financial confidence aside from becoming a homeowner, so don’t let FOMO or comparing your situation to others get you down. Having confidence in your plan, whatever that may be, will pay off in the long run.