A little reflection on some key areas can help you make the most educated decision possible on whether to rent or buy a house is right for you.
There comes a time in life when you may ask yourself, “Should I keep renting, or should I buy my own home?” As innocuous a question as it may seem, there are many factors involved in making the leap from renting to homeownership — some that you expect, and some… maybe not so much.
While there’s no foolproof formula to determine which route is 100% right for any one person, a little reflection time in some key areas can help you make the most educated decision possible.
Am I financially prepared to buy a home?
According to lifehacker.com, your home should cost no more than 2.5 times your salary, which is a ballpark figure that doesn’t consider your full net worth. For a better calculation of the amount you can afford, factor in the following: take-home pay, your debt, other life priorities, and a little cushion for expenses.
In just a few years, these estimates may be a good guide to make budgeting decisions, but may not always take into consideration the affordability of homes where you live.
There’s often more to it than just a quick calculation, too. You’ll need to factor in things before you are ready to make a decision or even think about moving in.
The most obvious factor in determining if you can afford to buy a house is pinning down what your monthly mortgage payment will be. There are several factors that impact what you will pay: the cost of the house, how much money you put down, your interest rate (APR), the loan term, and the loan type.
Recommendations around what percent of your income should go towards your mortgage payment vary. Conservative estimates may be as little as 25% of your take-home pay. Lenders, however, recommend that you aim for less than 35% of your pretax income. Keep in mind your rental costs won't include the upkeep and insurance of home ownership, so these are two different calculations.
Another big factor in the home buying process is the very large upfront cost of the down payment. While theories on the actual amount can be somewhat inconsistent, many experts agree that it’s in your best interest to pay as close to that 20% as possible.
Not every lender will require that much money up front, but here are good reasons to put down as much as you can, according to Nerdwallet.
If you really aren’t sure or comfortable with your financial estimates, you can always simulate a test. Forbes.com recommends essentially starting to set aside money as if you had a mortgage. “Let’s say that you’re paying $1,000 a month in rent, and you estimate that your all-in cost for a nice house would be $1,500 a month. Fine. Put aside $500 a month, every month, to show that you can cover the higher monthly payment. You’ll accumulate some money for your down payment or cash reserves.”
Am I throwing money away renting a home?
Seems like a straightforward enough question, right? But, of course, there’s a lot to think about when contemplating the answer. If you are just starting to save, or have a thin credit history, it may not be the right time. Yet.
First of all, you have to factor in the differences between actual properties. In the past, the own-or-rent decision was largely about whether to live in a house or apartment. That’s no longer true.
Condos allow ownership of a multi-family residence, and the opportunities to rent a stand-alone house are greater than ever before. So the own-rent decision should be apples-to-apples with comparable properties. If you are thinking about moving from a small apartment and buying a medium-sized house, you’ll find that it’s more expensive simply because you’re getting more square footage and a yard.
Costs of renting a house
There are potential opportunity costs for both renting and buying. When buying, you can eventually own your home. One day, you’ll pay that home off and it’ll be yours, rather than continuing to pay rent for the rest of your life and missing out on owning an asset.
There’s also the “cost” of a lack of home equity and the inability to claim housing-related tax breaks. An example of this is illustrated by Money.cnn.com: “suppose you're a homeowner who lives in New York and falls within the 28% income tax bracket. If your mortgage is $200,000 with a 4.5% interest rate, you qualify for $3,585 a year in tax deductions.”
The best way to determine the benefits of renting versus owning where you live is to speak to an expert in your community, like a community banker. They may have a good perspective on the mortgages they have closed in recent months and how the monthly payments compare to rental amounts.
Costs of buying a house
On the opposite end of the spectrum, there’s also the opportunity cost of buying to consider — things like the down payment and the mortgage interest payments. The cost of the down payment is large, especially in expensive areas, which is a lot of your net worth to give up at once. It may make more sense to put less down and invest the difference.
Homeownership also comes with a multitude of expenses that don't impact a renter's monthly budget. When you buy your own home, you will also need to factor in homeowner’s insurance, private mortgage insurance (PMI), home-owner association (HOA) fees, property taxes, and maintenance.
Am I mentally and emotionally ready to buy a house?
Yes, this may seem like a heavy question to ask yourself, but there may be more soul-searching involved in getting to the answer than you realize. When contemplating homeownership, it’s important to factor in the big picture of becoming a homeowner.
Life ebbs and flows, making it impossible to know exactly where you’ll be tomorrow — let alone 30 years from now. However, you can examine your current situation and think through the likelihood of different scenarios that could occur. Things like student status, plans for travel, temporary work assignments, divorce, or family planning, for example, could significantly impact the length of time you’ll stay in one place.
Qz.com further supports this point saying, “If you are going to own a house for 30 years, these [fixed costs when buying a house] do not matter much. But if you’re planning to sell in a few years, they significantly raise the effective buying price.”
The stress of preparing to buy a home, plus the stress of closing and moving can be draining, too. It's helpful to enter the home-buying process knowing there are many steps, many of which may feel uphill at times.
Not every answer about buying a home is always about the dollars and cents.
Look at these home options from all angles
All of these things are important to take into consideration, obviously. But it’s not a matter of picking and choosing. The best approach is a holistic one. Luckily, there are actual calculators (like this one at Bankrate.com) that help get to the heart of the question by asking a series of questions, such as:
Amount in savings
Amount of debt
Length of time you plan on staying in the home
Prices (and fluctuations) in the area where you want to live
Tax deduction impacts
Monthly budget for covering all homeowner costs
The effort to upkeep and maintain the property
Unexpected emergency costs
How deep you want to plant roots in the location
All in all, there’s A LOT to consider. But the most important thing is to make sure that whatever the decision you make, it’s something you’re making for yourself. There are a lot of people with a lot of opinions out there. But the truth of the matter is sometimes it’s right, and sometimes it’s not (at least not right now).