Collette Reitz
I moved to Washington, D.C., in 2010, and I was perfectly happy as a renter. Neither of my apartments were luxurious. But in an expensive city with limited housing, I paid below market rate for my first place (my roommate and I had our own bedrooms, thanks to a makeshift wall). Later, when I wanted to live alone, I landed an underpriced studio in a rent-controlled building. But as more friends purchased shiny condos or casually speculated about future plans to buy, I wondered whether buying was something I should consider.
The nagging feeling that buying is something you should do is one big reason that millennials choose to buy, said Bill Nelson, a certified financial planner and founder of Pacesetter Planning near Boston. We've also been told that buying is an investment, and renting is "just throwing money away."
Adding up the costs. Many experts recommend buying only if you expect to park yourself there for at least five to seven years. What if you like your city and current situation but also have no idea where life will take you in the next five to seven years? Sometimes, "the most you can say is 'I plan to stay in the same spot, knowing everything about my circumstances, career and family today,'" said Jeff Tucker, an economist at home-price site Zillow.com.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The costs are ever-changing (and usually rising), which can put buying a home out of reach for many potential homeowners. A 30-year fixed-rate mortgage loan has a 7.2% interest rate as of September 2023, and according to Kiplinger’s Economic Outlook, there’s no downward trend coming in the near future. Not only is the interest rate rising, but so are home costs. The median price of a home in the first quarter of 2023 was $416,100, according to the Federal Reserve Bank of St. Louis. That’s more than $100,000 higher than the median price of a home ($329,000) prior to COVID in January 2020.
An online rent-or-buy calculator, such as those from SmartAsset.com or Zillow, can run some quick calculations after you enter your location, rent, target home price, size of down payment and other factors.
Don't underestimate other costs associated with buying a home. Closing costs, including the appraisal fee and loan origination fee, typically cost 2% to 5% of the purchase price of the home. Increases in ongoing expenses such as property taxes can blindside new homeowners, says Nelson.
Eric Simonson, a CFP and owner of Abundo Wealth in Minneapolis, advises clients to plan on spending 1% of the home's value each year for maintenance and upkeep. Finally, if you put less than 20% down, you'll need to sink even more money into private mortgage insurance.
When Simonson speaks with clients who want to buy a home, he asks them how much they pay in rent and pulls up several properties where they would pay the equivalent after factoring in monthly mortgage payments, taxes, insurance and upkeep. "More often than not, they find they aren't getting such a bad deal renting, especially if they live in areas where the cost to purchase is very high," he says.
In some locations, renting can be cheaper than buying, depending on the size of your down payment and the length of time you stay in the home. Zillow found that renting beats buying in San Jose, San Francisco, Honolulu, Oakland, Seattle, Salt Lake City and Anaheim, assuming you put down 10% and stay in the home for five years. Even if buying comes out ahead, renting allows you the flexibility to make big life changes and affords you the time to save up for a down payment and the cash needed to cover up-front and regular expenses.
Renters could, on average, accumulate more wealth than homeowners if they invested the equivalent of a down payment plus the difference between a monthly mortgage payment and rent in a diversified portfolio, according to Eli Beracha, coauthor of a study on homeownership in the Journal of Housing Research. Most renters don't do this, and for most people, buying is a better financial choice in the long run. But don't rush. "I've never met with someone and said, 'The problem with your finances is that you bought a home way too late,'" says Nelson. "But I've seen plenty of people who have messed up their financial situation by buying a home too early."
Related Content
-
The Most Popular Apps for Retirement Planning in 2025A J.D. Power survey ranks retirement planning apps based on customer service and satisfaction. Does your financial app make the cut?
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary FormsStandard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
Can You Afford a Million-Dollar Home on a $250,000 Salary?It’s more than the sticker price — mortgage rates, down payments, taxes and debt all factor into whether a million-dollar home fits your budget.
-
Why a Landmark Real Estate Commission Settlement Hasn’t Lowered Costs for HomebuyersThe 2024 NAR settlement promised commission transparency and negotiation —but one year later, average fees remain unchanged. See why change has been slow and what it means for homebuyers and sellers.
-
Lock or Float? How to Decide on Your Mortgage RateMortgage rates move daily, here’s how to know if you should lock in a rate now or let it float until closing.
-
The Role of a Mortgage Underwriter in Buying a HomeFrom fast-track approvals to manual reviews, here’s what to expect (and how to avoid delays) in the underwriting process.
-
My Mortgage Rate is 6.5%. Should I Refinance If Rates Fall By Half a PointA half-point dip may not be enough to offset closing costs. Here's the magic number that makes refinancing pay off.
-
How Home Appraisals Work — and What the Final Value MeansFrom comps to contingencies, here’s what a home appraisal reveals about your property’s true worth.
-
Should You Sell Your House Now or Wait? What to ConsiderWith rates holding steady and market shifts ahead, here's how to decide whether to list your house or wait.
-
The 28% Rule for Housing: Does It Still Work in Today’s Market?Rising home prices and stubborn mortgage rates put this long-standing rule to the test.
