What Is the Difference Between Renting a House & Buying One?
Both renting and buying a house can provide your family with a safe, affordable place to live. However, there are clear differences between these options. If toying with the idea of owning your place, weigh the pros and cons before deciding whether buying or renting is a more suitable option for your family.
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Credit Criteria
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An important difference between renting and buying a house involves credit requirements. If you are renting a property from a private landlord, the landlord may focus little attention on your credit history -- as long as you maintain a good rental history and have enough income to afford the rent. Quite the opposite is true when buying a home, because mortgage loans are specific with regard to credit score requirements and other financial requirements. On average, mortgage lenders require a minimum score of 680, according to the Home Loan Learning Center. Applying for financing with a score below this minimum and having other credit issues, such as charge-offs or collection accounts on your credit report, can halt the approval process.
Financial Obligation
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The mortgage payments on a property can be less than rent payments in some cases. However, acquiring a mortgage loan is much more expensive than acquiring a rental home. It's standard for landlords to require first month's rent and a security deposit. But if you're applying for a mortgage loan, you'll need cash to make your down payment (typically at least 5 percent of the purchase price, and often more), plus any closing costs linked to the mortgage loan, which can cost as much as another 5 percent of the loan balance. You can negotiate closing costs where lenders finance this cost into the mortgage loan, or the seller may agree to pay the closing fees.
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Maintenance and Upkeep
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Renting a home might be more convenient for people who don't want to worry about a house's upkeep. Homes occasionally need repairs, and homeowners will periodically replace appliances, flooring, windows or fences and may deal with other improvement projects. Maintaining or updating a property is costly over the years, and some people may not want the responsibility that comes with homeownership. Renters aren't legally responsible for improving properties, nor are they responsible for necessary repairs and fixes.
Equity and Taxes
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While renting is an option for people who don't want to be held accountable for the financial aspect of owning a home, renters miss out on the opportunity to build home equity, and they miss out on certain tax advantages. Buying a house can help increase an owner's net worth because homes typically increase in value over the years. Thus, owners can sell the house down the road and possibly earn a sizable profit. What's more, property owners can deduct the mortgage interest they pay each month from their taxable income, which reduces their tax liability and could result in a tax refund. Homeowners also have to pay property taxes, which is an expense renters don't have to pay, although homeowners can deduct the amount of their property tax from their taxable income to lower their tax liability.
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