The Real Cost of Renting vs. Owning -- What Does It Cost to Buy?

Millions of Americans moved in 2020 as COVID-19 upended the nature of work and led households to reassess their finances and location. Plummeting mortgage rates led home sales to their highest levels since 2006.

With many renters considering making the shift to owning a home, it's important for them to understand the true costs of owning a home.

Comparing the cost of renting and owning a home goes beyond the mortgage and rent prices. The real cost of owning a home includes other expenses that are relatively minor or non-existent when renting, such as property taxes, maintenance, and closing fees. Renters and owners also, on average, pay different costs for common expenses like utilities.

We gathered statistics on the average real costs of renting and owning a home to break the comparison down.

Key findings

• Homeowners with a mortgage pay $8,609 more than renters every year: On average, in 2019, homeowners with a mortgage paid $26,418 per year on total housing costs while renters paid $17,809 -- about $717 more per month. (Total housing costs include mortgage or rent, but also maintenance, utilities, and other costs that we'll discuss shortly.)
• Mortgage payments cost less than rent: In 2019, homeowners paid $7,229 towards their mortgage, including interest. Renters paid $11,979 in rent. Overall, homeowners with a mortgage paid $4,750 less.
• Property taxes are a unique homeowner cost: Renters paid near-zero property taxes in 2019. Homeowners with a mortgage paid $3,695 in property taxes over the course of the year.
• Homeowners face higher utility bills: Homeowners with a mortgage paid an average of $5,152 on utilities in 2019. Renters paid $2,736 on utility bills, a total of $2,416 less.
• Maintenance is a significant homeowner cost: Homeowners with a mortgage spent $2,812 on maintenance and repairs in 2019. For renters, those maintenance costs are generally covered by rent.
• Rent takes up more household income: On average in 2019, monthly housing costs accounted for 19% of the household income of homeowners, while monthly housing costs accounted for 30% of the household income of renters.
• Buyers seem willing to make zero down payment: Of those who purchased a home in 2019, 15% didn't make a down payment. 18% of homebuyers made a down payment worth between 16% and 20% of the value of the home.
• First-time buyers pay an additional $18,000 in the first year: First-time home buyers paid a $12,672 average down payment and accrued $5,749 in closing costs. That adds up to $18,421 in upfront costs borne by homebuyers.
• First-time homebuyers should be ready to pay $27,000 more in the first year of homeownership: Between the $18,000 in down payment and closing costs coupled with the $8,609 typical housing costs, first-time homebuyers will need around $27,000 more for owning in their first year.

Homeowners paid $8,609 more in annual housing costs than renters in 2019

According to the latest data from the U.S. Census Bureau’s Consumer Expenditure Survey, in 2019, homeowners with a mortgage paid $8,609 more a year on total housing costs than renters. Total housing costs include mortgages, real estate taxes, property insurance, homeowners association fees, utilities, maintenance, and other costs.

Homeowners with a mortgage paid $3,695 on property taxes in 2019 -- a charge generally inapplicable to renters.

Renters’ utility bills in 2019 came out lower than homeowners with a mortgage. Renters paid $2,736 for water, electricity, gas, fuel oil, other fuel, and trash collection. Homeowners paid $5,152 for those services.

Homeowners with a mortgage experience higher maintenance and insurance costs, as well. They paid $2,812 on average in 2019. Renters paid $61, likely because rent payments generally cover maintenance costs and renter’s insurance is generally cheaper than the equivalent insurance for homeowners.

Most renters can plan on paying around $8,609 less a year than homeowners, depending on location, when all monthly costs are considered. According to the Census Bureau’s American Housing Survey, monthly housing costs accounted for 19% of the household income of homeowners, while monthly housing costs accounted for 30% of the household income of renters, despite the overall costs of renting being about 20% less than the overall costs of owning.

First-time home buyers may pay an additional $18,400 in their first year

Of course, renters considering buying a home need to think about more than just the monthly costs. Getting into a first home comes with a host of other expenses.

Between down payments and closing costs, first-time homebuyers can plan on paying, on average, $18,421. Here's how that breaks down:

Average down payment for first-time homebuyers: $12,672

During the homebuying process, costs arise that don't during the rental process. The most significant is generally the down payment on a house.

According to the American Housing Survey, 18% of home buyers made a down payment of 16% to 20% of the value of the home they were purchasing, making it the most common choice. 16% of buyers made a down payment of 6% to 10% of the home’s value.

15% of buyers made no down payment at all.

The median down payment on a house made by first-time homebuyers in 2019 was 6% and 16% for repeat buyers, according to the National Association of Realtors. The average cost of home in 2019 was $211,200, according to the U.S. Census Bureau's American Housing Survey. Based on that data, we can estimate that first-time homebuyers in 2019 made an average down payment of $12,672.

Older home buyers were less likely to put nothing down when buying a house. Correspondingly, the older the homebuyer, the more likely they were, generally, to make a down payment that was a higher percentage of the home’s value or buy the home outright.

47% of homebuyers used savings or cash on hand for their down payment

Savings or cash on hand was the most popular source of a down payment for a house, used by 47% of homebuyers in 2019, according to the American Housing Survey.

The second most popular source of funds for a down payment was the sale of a previous home, which 29% of Americans relied on. Only 1% of Americans sold other investments to fund their down payment.

Average closing costs: $5,749

Closing costs are fees associated with closing a mortgage. Closing costs in 2019 came out to about 1% to 5% of the home's sale price, according to ClosingCorp, a provider of data and technology for real estate services. Average closing costs vary by location.

The average closing cost in 2019 came out to $5,749, including taxes. Without taxes, that figure is $3,339. Homeowners that sell their home while buying a new one are able to use money from that sale to pay these costs. First-time homebuyers don’t have that benefit and will need to plan accordingly.

Closing costs can encompass a wide variety of things from appraisal fees and home inspections to underwriting and insurance application fees. Keep in mind that most of the best mortgage lenders don't charge application fees (or charge very low fees).

Another consideration: real estate agent commissions

Real estate commissions are generally 5% to 6% of the home’s sale price, paid for by the seller, and split between the buyer and seller’s agents. But sellers may pass the commission onto the buyer by including it in the listing price.

Commissions have recently begun to drop slightly, driven by antitrust action against the National Association of Realtors and buyers and sellers relying less on agents and more on technology.

First-year homeownership can cost $27,000 more than renting

Between a down payment on a home, closing costs, and the higher total costs of owning than renting, first-time homebuyers may be looking at paying around $27,000 more than when they were renting in the first year of homeownership.

After the first year, they can plan on paying about $8,600 more per year.

Is buying a home worth it?

All of these calculations are likely to lead to the question of whether renters should consider buying a home. $27,000 in the first year sounds like a lot.

But there are many non-financial factors for renters to consider. Lots of people find that owning a home is worth it because of the security that owning provides, for example. Your rent won't go up, your rental management company won't change, and you're less likely to have a parade of new neighbors every year or two.

There's also the fact that you're getting on the "property ladder," which may help you build equity and net wealth over time.

It's also worth noting that the latest data released from the Census Bureau is from 2019, and in early 2021, we're seeing record-low mortgage rates. That may change the math on your purchase.

Buying a home is almost always going to necessitate higher monthly payments than renting in the same locale. But there are mental, emotional, and possibly long-term financial benefits to be had.

Renters can weigh their options by using our mortgage payment calculator and getting quotes from the best mortgage lenders for first-time buyers to get an idea of how much they'll actually pay each month. Getting a high-interest savings account is a good first step, too, as a 20% down payment means they don't have to pay for private mortgage insurance.

Sources

• ClosingCorp (2020). "ClosingCorp Reports Average Mortgage Closing Cost Data for 2019."
• National Association of Realtors (2020). "Downpayment Expectations & Hurdlers to Homeownership."
• QuickenLoans (2020). "Closing Costs: What You Need to Know."
• U.S. Census Bureau (2020). "American Housing Survey."
• U.S. Census Bureau (2020). "Consumer Expenditure Survey, Housing Tenure of CU."
• U.S. Department of Veterans Affairs (2020). "VA funding fee and loan closing costs."
• U.S. Federal Housing Administration (2021). "FHA Requirements."