Is It Better to Rent or Buy a House?

In today's expensive real estate market, many people are facing a dilemma: Is it better to rent or buy a house? While the answer may not be the same for everyone, there are common factors to consider.

Renting vs. buying may be cheaper for many in the short term. However, the potential for building wealth through homeownership could be significant. Here's how to decide which option is right for you.

Is it better to rent or buy?

Between high home prices, rising interest rates and low inventory, is it a good time to buy a home? After all, depending on where you live, monthly rent may be lower than the cost of a mortgage payment. However, basing the decision to rent vs. buy on immediate costs may be a mistake. For many people, the long-term cost of renting vs. purchasing a home can be significant.

The cost of renting vs. buying

A fixed-rate mortgage is designed to remain steady over time, with a set interest rate and loan repayment amount. That kind of stability may provide a lot of peace of mind. Plus, if you've paid off your mortgage by the time you reach retirement age, debt-free homeownership may help make your cost of living more manageable.

Of course, there are fluctuating expenses associated with homeownership that you should consider. Over time, property tax increases can have a substantial impact on the total amount that you'll pay each year. Plus, homeowners in some states may experience unexpected jumps in home insurance premiums—particularly in areas prone to natural disasters.

Meanwhile, rent prices tend to increase over time. While the annual rate of increase may be modest—somewhere around 3%, depending on where you live—it can also leap far higher than expected, putting many renters in a difficult position.

According to Zillow's January 2024 Rental Market Report, rents are 30% higher than before the COVID-19 pandemic. So even if renting is cheaper than buying today, that might not always be the case.

If the cost of owning a single-family home is out of reach, buying a condo may be one alternative to consider. Depending on where you live, this may be a good way to get on the property ladder without the expenses associated with a house.

Homeownership as a key driver of wealth

As you explore the benefits of buying vs. renting, it's also helpful to consider the potential for building wealth through homeownership. Even if the decision to rent vs. buy makes financial sense in the short term, data shows that over many years, it may come at an opportunity cost. According to a 2023 study by the National Association of Realtors, or NAR, people homeowners have 40 times more wealth than renters.

How homeownership builds wealth

As your home increases in value, it contributes to your net worth. In 2023, the average home appreciation for the year was 5.5%, according to the S&P CoreLogic Case-Shiller Indices. Over time, the gains may be significant. Since 2012, the average middle-income family has seen their home appreciate by 68%, according to NAR.

As a result, these homeowners have seen their wealth grow by an average of $122,100. This type of appreciation does more than just contribute to personal wealth—it's also a key contributor to generational wealth. Generational wealth refers to assets passed down to family members, and a home is often a significant part of that legacy.

How to use home equity to build wealth

When you pay a mortgage, you build equity—the current value of your home, minus outstanding balances for any loans against the property—over time. That equity acts like a savings account, steadily growing and contributing to your overall net worth.

Between 2018 and 2023, for example, total US homeowners' equity grew by $15 trillion, according to the Federal Reserve Bank of St. Louis. Renters, of course, don't see this benefit—their monthly housing payments go toward someone else's net worth.

Equity isn't just valuable when you sell your home—it may also serve as a powerful financial tool. Homeowners may borrow against their home equity at favorable terms to fund a variety of goals, such as consolidating higher-interest debt, paying for college or starting a business.

Simply put, homeownership can be an important pathway to wealth for many Americans, whereas continuing to rent—even if it's more affordable—is essentially putting money in someone else's pocket. If you're ready to buy a home but are sitting on the sidelines, it may be time to reconsider.

Am I financially prepared to buy a house?

Ultimately, your decision to rent or buy a home should depend heavily on one major factor—whether you’re prepared to do so. Here's what to consider.

• Is your credit report free of blemishes and inaccuracies?
• Have you taken steps to improve your credit score?
• Have you taken steps to pay down existing debt?
• Have you saved for a down payment?

If you've answered no to any of these questions, taking the time to engage in financial planning to buy a house will be an important first step. Getting your finances in tip-top shape is key to securing the best mortgage terms possible—which is particularly important in today’s rate environment.

Also, remember that knowledge is power. Educating yourself on all of the steps to buying a home can also help ensure you're ready to make informed decisions.

The bottom line

So, is it better to rent or buy a house? While choosing to rent vs. buy may seem easier and less of a risk, it comes with a steep opportunity cost. After all, every dollar you give to your landlord is a dollar you could be paying your future self. The long-term benefits of building wealth through homeownership are so compelling that it's worth considering.