Renting Versus Buying a Home
Mateo is 24 and just got a full-time job in Houston. His lease ends in two months. His friends say, "Rent is just throwing money away." His landlord says, "Buying is a big risk right now." Who is right? In this section you will learn to put numbers on both choices, so you can decide using evidence instead of opinions. At the end, we will come back to Mateo's question.
Renting: the basics
When you rent, you pay a landlord for the right to live in a home you do not own. The agreement is a lease, a contract that sets the monthly rent, how long you can stay (often 12 months), and the rules for both sides.
Most landlords ask for a security deposit when you sign, often one month's rent. It covers damage beyond normal wear and tear. If you leave the place in good shape, you should get it back.
| Renter's responsibilities | Renter's rights |
|---|---|
| Pay rent on time | A safe, livable home |
| Follow the lease rules | Proper notice before the landlord enters |
| Pay for damage you cause | Return of the deposit (minus legitimate damage) |
| Give notice before moving out | Repairs to major systems, such as heating and plumbing |
Renting usually has lower upfront costs and the landlord handles major repairs. But rent can rise when the lease renews, and your payments do not build ownership.
List two advantages and two disadvantages of renting compared with buying a home. Then say whether each one mainly affects flexibility, cost, or risk.
List two advantages and two disadvantages of renting compared with buying a home. Then say whether each one mainly affects flexibility, cost, or risk.
Buying: down payment, mortgage, and closing costs
Most people cannot pay cash for a home, so they borrow. Three terms come up again and again:
The amount you borrow is the price minus the down payment:
$$\text{loan} = \text{price} - \text{down payment}$$The cash you need on closing day is the down payment plus the closing costs.
A fixed-rate mortgage keeps the same interest rate for the whole term, commonly 30 years, so the principal-and-interest payment never changes. Lenders also like a bigger down payment because it lowers their risk.
Define these terms: down payment*, mortgage*, and closing costs*. Write one sentence for each.
Define these terms: down payment, mortgage, and closing costs. Write one sentence for each.
Olivia wants to buy a home that costs $\$250{,}000$ and plans to make a down payment of $20\%…
Olivia wants to buy a home that costs $\$250{,}000$ and plans to make a down payment of $20\%$. Find the amount of her down payment and the amount she must borrow with a mortgage.
Ethan will buy a $\$220{,}000$ home. He plans to put $5\%$ down, and closing costs are $3\%…
Ethan will buy a $\$220{,}000$ home. He plans to put $5\%$ down, and closing costs are $3\%$ of the home price. Find the cash he needs at closing. Then explain why many first-time buyers are surprised by this total.
The true monthly cost of owning
A mortgage payment is only part of what owners pay. Lenders and financial planners talk about PITI:
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Principal: the part of the payment that reduces the loan
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Interest: the lender's charge for borrowing
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Taxes: property tax, paid to the local government, which helps fund school districts
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Insurance: homeowners insurance, which covers damage such as fire or storms
On top of PITI, owners pay for maintenance (a common rule of thumb is 1% of the home's value per year) and sometimes HOA fees. Renters do not pay these separately.
If your down payment is less than 20%, the lender usually requires private mortgage insurance (PMI), a monthly fee that protects the lender, not you. It usually ends once you have built enough equity.
Liam can rent an apartment for $\$1{,}500$ per month. To buy a similar home, he would pay a mortgage of $\$1{,}350$, property taxes of $\$300…
Liam can rent an apartment for $\$1{,}500$ per month. To buy a similar home, he would pay a mortgage of $\$1{,}350$, property taxes of $\$300$, homeowners insurance of $\$100$, and maintenance of about $\$250$, all per month. Find the monthly cost of owning and the yearly difference between owning and renting.
Isabella is buying a $\$300{,}000$ home with a 30-year fixed-rate mortgage at $6.5\%$. With $10\%$ down, the loan is $\$270{,}000$, the monthly mortgage payment is about…
Isabella is buying a $\$300{,}000$ home with a 30-year fixed-rate mortgage at $6.5\%$. With $10\%$ down, the loan is $\$270{,}000$, the monthly mortgage payment is about $\$1{,}707$, and she must also pay private mortgage insurance (PMI) of $\$150$ per month. With $20\%$ down, the loan is $\$240{,}000$, the payment is about $\$1{,}517$, and there is no PMI. Find each down payment and each total monthly cost. How many months of lower payments does it take for the extra down payment to be repaid in savings?
Renting versus buying: weighing the decision
Money is not the only factor. Use the decision process: identify the problem, gather information, list options, weigh advantages and disadvantages, choose, and evaluate.
| Renting | Buying | |
|---|---|---|
| Cost | Lower upfront cost; no repair bills | Down payment, closing costs, upkeep |
| Flexibility | Easy to move when the lease ends | Selling takes time and costs money |
| Risk | Rent may rise; no ownership | Home value can fall; repairs can be big |
| Benefit | Predictable, simple budget | Builds equity (value minus loan); fixed payment |
Selling is expensive too. Sellers often pay about 6% of the price to agents and fees. So buying usually pays off only if you stay long enough, often five years or more.
Aaliyah is comparing buying a $\$280{,}000$ home with renting for 5 years. If she buys, she pays $10\%$ down plus closing costs of $3\%…
Aaliyah is comparing buying a $\$280{,}000$ home with renting for 5 years. If she buys, she pays $10\%$ down plus closing costs of $3\%$ of the price. Her total monthly owner costs (mortgage, taxes, insurance, maintenance) are $\$2{,}000$. After 5 years she would sell the home for about $\$324{,}600$, pay selling costs of $6\%$ of that price, and still owe about $\$238{,}000$ on the loan. If she rents, she pays $\$1{,}600$ per month for 5 years. Find her net cost of buying and her cost of renting. Then discuss two factors this simple comparison leaves out and say when renting is the better choice.
Can you afford it? Lender guidelines
Lenders check whether a buyer can handle the payments. Two common guidelines are the 28/36 rule:
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Housing costs should be at most 28% of gross monthly income (income before taxes).
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Total monthly debt payments, including housing, should be at most 36%.
Lenders also look at your credit score and may give you a pre-approval, a letter saying how much they would likely lend.
Back to Mateo's question at the start. Neither his friends nor his landlord is automatically right. If he plans to stay several years, can afford PITI, maintenance, and closing costs while meeting the 28/36 guidelines, buying can make sense. If he might move soon or his budget is tight, renting is the better choice.
Mateo earns $\$70{,}000$ per year before taxes. A common lender guideline says housing costs should be at most $28\%…
Mateo earns $\$70{,}000$ per year before taxes. A common lender guideline says housing costs should be at most $28\%$ of gross monthly income, and total monthly debt payments at most $36\%$. Mateo wants a home with a total monthly housing cost of $\$2{,}000$, and he also pays $\$450$ per month on a car loan and student loan. Find his gross monthly income, both limits, and whether he meets each guideline. Recommend what he should do and justify it.