If you are an adult who pays rent, you have probably felt pressure from your loved ones and social circle alike to “stop throwing your money down the drain” and purchase a home.
Once touted as a sound investment, research has shown that in most cases real estate values barely outpace inflation. The recession of 2008 created an ugly reality. Millions of homeowners found themselves in predatory mortgages that they couldn’t afford, ultimately leading to the national foreclosure crisis. The crisis also birthed my golden rule, “just because the bank approves you for it, doesn’t mean that you can afford it.” As the economy rebounds and debt levels approach their pre- financial crisis levels, confident buyers are seeking to bring their dreams of homeownership to fruition.
But when it comes to renting versus buying, how do you determine what makes the most financial sense for you?
Let’s start with the basics.
Regardless of your housing decision, you should aim to spend no more than 20-30 percent of your take home pay on housing. As a homeowner, you will also need to account for insurance, taxes and fees. While mortgage simulators may project that homeownership is within your budget, you also want to calculate the additional costs associated with owning your dream home. Determine if you are still within the suggested percentages after the additional expenses.
Another factor you’ll want to consider is length of time you will live in the home. If you’re a free spirit who moves frequently or is not yet ready to commit to a city, you might be better off renting until you find a city that you can settle in. You could lose money by buying a home and reselling too quickly. Aside from the mortgage commitment, you’re likely responsible for a down payment and closing cost as well as several fees including home inspection, land survey, appraisal, attorney, title search, and mortgage processing fees. In order to cover the expenses associated with selling, your home needs to appreciate a minimum of 10 percent from the time you purchased it. The market fluctuates and can shift from a seller’s market to a buyer’s market in a matter of days. If you exhaust your savings to buy a home only to lose that money in a premature sale, you would have been better off renting and investing the lump sum.
So, when does it make sense to rent?
Here are some situations where renting is what’s best for you:
- If you frequently relocate or have unstable employment
- If your credit score and history aren’t strong enough to qualify for a competitive interest rate
- If you are not sure if you want to remain in the same city and are uninterested in becoming a landlord
- If you are uninterested in homeownership and the responsibility that comes along with it
And, when does it make sense to buy?
Let’s discover some instances where buying is what’s best for you:
- When buying actually does save you more money
- When you are stable and want the stability that homeownership offers, this includes your job, relationship, etc.
- If you have enough money saved to cover maintenance emergencies
Homeownership was once touted as one of the best ways to build wealth, but that isn’t necessarily the case today. Millions of homeowners found themselves “house poor” following the recession. Regardless of your peers’ financial decisions, you have to assess your life goals and determine if homeownership is right for you.