Would you rather put money toward your own investment rather than your landlord’s? If you’re ready to build equity and paint your kitchen any color you please, then it may be time to decide whether to rent or buy a home.
Homeownership is a major financial and lifestyle decision. You’re responsible for a mortgage loan, maintenance, and repairs. Plus, you can’t pick up and move next month if spirit moves you. Weigh out your personal renting vs. buying pros and cons before you terminate your lease. Here are five factors to consider when deciding whether to rent or buy a home.
Are you reasonably settled in your current city? If you plan to stay in your home for four or more years, it makes sense to buy. It takes at least this long (or longer) to build equity, and you need a certain amount of equity to break even when you sell.
If you like to travel and don’t want maintenance, consider buying a condominium, says Sindy Ready, REALTOR®, associate broker, and team leader for the RE/MAX Excalibur Ready Callaghan Team in Scottsdale-Phoenix, Arizona. The homeowner’s association fee (HOA) usually covers maintenance, exterior repairs, landscaping, and other amenities.
Just moved to a new city? Rent first. “Take six months to a year and explore different areas to see where your lifestyle and social life end up before you buy,” Ready says.
The Real Estate Market
If you plan to stay in your home a while, you may spend less on your mortgage payment than rent. A GoBankingRates study found it’s cheaper to own in 27 U.S. cities, including major metropolitan areas such as Philadelphia, Washington D.C., and Miami. In some of the most competitive real estate markets — think New York, San Francisco, and San Jose, California — it’s cheaper to rent.
Ready’s sister-in-law analyzed the pros and cons of renting a house vs. buying when she had to move out of her Dallas apartment due to renovations. If she returned, she faced a 30 percent rent increase.
She found a brand-new house for less than what she originally paid in rent. “She found the perfect house, got to pick out the counters and other upgrades and amenities, and the house is worth more now than what she paid when she bought it due to market increases,” says Ready.
In a down market, some sellers offer lease-purchase options. In this type of agreement, you can find homes for rent with an option to buy after one or two years. Typically the buyer pays a higher monthly rent, with a portion set aside for the future down payment. A lease-purchase contract can work if you fall in love with a home but don’t have a ready down payment.
However, if you decide not to purchase the home, you lose your down payment funds, Ready says. If you go this route, make sure you’re confident in your home choice.
Your Debt-to-Income Ratio
Your debt-to-income ratio affects your mortgage interest rate and whether you can qualify for a loan at all. Debt-to-income ratio is your monthly debt (credit cards, student loans, car payments) divided by your monthly pretax income. The lower your debt-to-income ratio, the more favorable your interest rates.
Remember, debt-to-income ratio doesn’t give you the full picture of whether you can afford a mortgage. To do that, you need to account for all your expenses.
If you carry a lot of debt, then your best option is to keep renting while you pay down your credit cards, student loans, and other debt. Also, don’t take on more debt while you’re planning to buy a home.
Your Financial Readiness
Homeownership involves much more than a mortgage payment. You have to come up with cash for a down payment and possibly closing costs and appraisal and inspection fees, before you sign on the dotted line. Do you have the savings to cover these costs?
You also need to factor in home maintenance, homeowner’s insurance, and HOA if applicable. These costs add significantly to your monthly expenses. Don’t forget — if you’re moving from a small one-bedroom apartment to a three-bedroom home, you will want furniture to fill the extra space.
To determine whether you’re on track for buying a home, meet with a realtor and loan officer. “They’ll look at the whole picture,” says Ready. “They’ll put a plan together. At the end of the plan, you’re positioned to get the best loan. What you see on an online calculator probably isn’t what you’ll actually pay. It could be higher or lower.”
On the upside, you may not need to save the suggested 20 percent down payment. you put 20 percent down, you lower your loan payments and avoid private mortgage insurance (PMI), which protects the lender if you stop making payments.
Many lenders offer conventional loans with five to 15 percent down. FHA offers a loan with as little as 3.5 percent down. Weigh the pros and cons with your loan officer to find the best option.
Your Immediate Future
Nobody has a crystal ball, but if your immediate future seems unstable, then you may want to rent. For example, if you’re retired and in ill health, then the upkeep of a home may become too much too soon. If you relocate frequently for work, or you’re not sure how long you want to stay in your current city, then you may want to postpone homeownership.
Also, think about your relationship future. Are you single and looking for a partner? Are you planning to start a family soon? Major life changes like marriage and children can impact the decision on where you plant roots.
Is it better to rent or buy at this point in your life? Consider all these factors when making these decisions for yourself.
Deciding whether to rent or buy is a major financial and personal decision. When you do decide to take the plunge, use CORT Furniture Rental to furnish your new home.