Renting Versus Buying a Home
Emma is about to graduate and move to Denver for her first job. She finds a one-bedroom apartment for $\$1,500$ a month. Her cousin says, "Rent is just throwing money away. Buy a place!" Is he right? By the end of this page you'll be able to answer that with numbers instead of slogans.
Renting: lease terms and real costs
When you rent, you sign a lease: a contract between you (the tenant) and the landlord. A few terms show up in almost every lease.
The grace period and eviction are connected. Paying late inside the grace period costs nothing. Paying after it ends triggers a late fee, and if rent stays unpaid, the landlord can start an eviction, which can damage your rental history for years.
Rent also depends on where you live, so compare rents and home prices in your own city. A one-bedroom in Denver costs far more than the same apartment in a small Ohio town, and that changes the rent-or-buy answer.
The monthly rent isn't your only cost. Add the deposit and renters insurance (which covers your belongings and your liability, and is often required by the lease).
Define "security deposit" and explain in two sentences what a landlord is allowed to use it for and when a tenant should get it back.
Define "security deposit" and explain in two sentences what a landlord is allowed to use it for and when a tenant should get it back.
Define "grace period" in a lease and "eviction." Explain how the two ideas are related when a tenant is late with rent.
Define "grace period" in a lease and "eviction." Explain how the two ideas are related when a tenant is late with rent.
Emma rents a one-bedroom apartment in Denver for $\$1,500$ per month. The lease requires a security deposit equal to one month's rent and renters insurance of $\$15$ per…
Emma rents a one-bedroom apartment in Denver for $\$1,500$ per month. The lease requires a security deposit equal to one month's rent and renters insurance of $\$15$ per month. Calculate her total cost during the first 12 months, including the deposit. Then state how much of that total she should expect to get back at the end of the lease if she leaves the apartment undamaged.
Jayden's lease says rent of $\$1,200$ is due on the 1st, with a 5-day grace period and a late fee of $\$60$ after that. In one month he pays on the 4th, and in another…
Jayden's lease says rent of $\$1,200$ is due on the 1st, with a 5-day grace period and a late fee of $\$60$ after that. In one month he pays on the 4th, and in another month he pays on the 8th. Explain which payments, if any, incur the late fee, and calculate the total late fees he pays over the two months.
Buying: what you pay beyond the mortgage
Most buyers borrow money for a home. The loan is a mortgage, and the home itself is the collateral: if you stop paying, the lender can take it. (For how mortgage payments are calculated, see the amortization pages.)
Buyers don't pay the full price at once. They pay a down payment, a percentage of the price, and borrow the rest.
$$\text{down payment} = \text{price} \times \text{percent down}$$ $$\text{amount borrowed} = \text{price} - \text{down payment}$$A bigger down payment means a smaller loan and a smaller monthly payment, and it makes you look less risky to lenders.
Owners also face costs a renter usually doesn't pay directly:
| Cost | What it is |
|---|---|
| Property tax | Yearly tax on the home's value, paid to the local government (often split into monthly payments) |
| Homeowners insurance | Covers damage to the house; lenders require it |
| Maintenance and repairs | A leaky roof or broken water heater is your bill, not a landlord's |
| Closing costs | One-time fees when you buy (loan fees, title, inspection), often a few percent of the price |
| Utilities and HOA dues | Some renters have utilities included; condo owners may pay monthly association fees |
A family buys a house for $\$300,000…
A family buys a house for $\$300,000$ with a down payment of 10%. Calculate the down payment and the amount borrowed. Then name two other costs of owning a home that a renter usually does not pay directly.
Comparing renting and buying
Neither choice is always better. Each has trade-offs.
| Renting | Buying | |
|---|---|---|
| Up-front cost | Deposit, first month | Down payment, closing costs |
| Flexibility | Easy to move when the lease ends | Selling takes time and money |
| Repairs | Landlord's job | Your job and your bill |
| Monthly cost | Can rise at renewal | Fixed-rate payment stays the same (taxes and insurance may rise) |
| Building wealth | No ownership | You build equity and the home may gain value (or lose it) |
To compare fairly, add up the monthly owning costs and compare them with rent.
A useful tool is the break-even idea: how many months of extra cost equal the up-front money?
Money isn't everything. Weigh non-financial factors: how long you'll stay in the area, job stability, wanting to paint or renovate, or not wanting to handle repairs. Also weigh the financial risk: home prices can fall, repairs can be expensive, and interest or tax costs can rise.
List two advantages of renting and two advantages of buying a home. Write one short sentence for each advantage.
List two advantages of renting and two advantages of buying a home. Write one short sentence for each advantage.
Sofia can rent an apartment for $\$1,400$ per month, or buy a condo. The condo's monthly costs are a mortgage payment of $\$1,350$, property tax of $\$250…
Sofia can rent an apartment for $\$1,400$ per month, or buy a condo. The condo's monthly costs are a mortgage payment of $\$1,350$, property tax of $\$250$, homeowners insurance of $\$90$, and maintenance of $\$150$. She would also pay a $\$30,000$ down payment up front. Calculate the monthly cost of owning and compare it with renting. Then argue whether renting or buying is better if Sofia expects to move in 2 years, using both short-term and long-term costs.
Mateo is deciding whether to renew his lease. His rent is $\$1,250…
Mateo is deciding whether to renew his lease. His rent is $\$1,250$ per month and the landlord is raising it by 6% for next year. He also has the option to buy a home for which his total monthly owning cost would be $\$1,700$, but he would need $\$24,000$ for a down payment and closing costs. Calculate the new monthly rent, the extra monthly cost of owning compared with renting, and the number of months of that extra cost that equals the up-front $\$24,000$. Then discuss two non-financial factors and one financial risk he should weigh.
Back to Emma: her cousin's slogan is too simple. Rent pays for flexibility and a landlord who handles repairs. A mortgage builds ownership but adds taxes, insurance, repairs, and a large up-front cost. The right choice depends on how long she'll stay and what she can afford.