Rent vs Buy: What you should know
Posted by Kya Thompson on May 11, 2017
There is an on-going debate as to whether it makes more financial sense to rent vs. buy, but the answer is not simple.
Renting a Home
It is no secret that renting a home or apartment is ‘easier’
than owning one. You as a tenant are probably not responsible for major repairs and monthly costs are usually fixed. Renting tends to provide the flexibility to move, as leases are short-term, usually a year or less. Another benefit of renting is the opportunity to save while renting. For example, if you are planning to purchase a home one day and expect your monthly mortgage to be around $1400 ($1100 + utilities + insurance + maintenance + property tax), renting an older or smaller space for $900 a month and saving that $500/month difference for 5 years can give you a $30,000 down payment, or more if you put that money into an interest-bearing savings account.
Buying a Home
For aspiring home buyers, it may be frustrating to compare yourself to people who purchased their homes in the 1980’s for $35,000 that are now worth $350,000. Of course, it is ideal to purchase a home in a buyer’s market when the supply of homes exceeds the demand for them; however, that is not the current market. There are many benefits to home ownership. Purchasing a home allows you to build equity. When you have equity, some financial institutions may allow you to borrow against this equity. Renting out a portion of your property may be a good source of income as well.
Everyone’s situation is unique, so we’ve designed eight easy “yes” or “no “questions you can ask yourself to help determine which option is more appropriate for you.
Are you planning on staying in this house/apartment for at least 5 years? You need to think about where you see yourself in the long term. Will you have the same job? Are you planning on starting a family? Are you looking to travel? If you buy and the market value of your home drops, you might lose money. On the other hand, renting for too long may mean tens of thousands of dollars down the drain.
Are houses/apartments in the area relatively inexpensive to buy and are you aware of the ongoing costs? Some housing markets favor renters, while others favor buyers. Do your research on the local area to determine which type of market you’re in. A major factor in buying a home is timing. It may not be ‘cheap’ to buy now, but if you’re planning on staying in the same area for a few years, it may be a better financial decision to buy a property now instead of renting. Make sure you factor other costs such as taxes and insurance into your decision.
Have you considered the cost and potential hassle of dealing with home repairs and maintenance? In other words, are you mentally and financially prepared for the work that comes with owning a home? Owning a home is a major lifestyle change and some people who can afford a home may not be prepared to deal with the added responsibility that comes with home ownership such as repairs and maintenance. If having to worry about upkeep for the home will outweigh your enjoyment from being able to call a place your own, you may want to consider whether you are ready to purchase a home.
Are you currently debt free? While most people aren’t entirely debt free, debt should be a major part of your home buying decision. The average American household has over $16,000 in credit card debt. Depending on your credit score you may have options, such as getting a personal loan to consolidate your debt at a lower interest rate before buying, but it’s still debt. It is very easy to become “house-poor” once you have a mortgage. Having a lot of existing debt will make it difficult to make ends meet.
Do you have a stable job or an emergency fund? Nothing will ruin your credit score faster than defaulting on your mortgage payments. Having an emergency fund (at least 6 months of living expenses) can help you avoid large late fees on a missed payment and prevent you from missing any additional payments that can lead to foreclosure of your home.
Do you have a good credit score and will you qualify for a mortgage? 740+ credit scores are considered excellent and will result in the best interest rates when it comes time to buy a home. If you have a good credit score, take advantage of it. If your credit score isn’t great right now, know that improving it is very doable. A fair credit score in the range of 630 to 680 will get you a mortgage but working yourself up to a good credit score between 680 to 740 may save you on your mortgage’s interest rate.
Do you have enough saved for a down payment? Experts suggest a 10% to 20% down payment for optimal financial health. The higher your down payment, the lower your monthly mortgage payment. Some banks and lenders will accept as low as 3% to 5%, but if you find yourself scraping your money together to hit 5%, you likely will have trouble coping with the costs associated with a lower down payment.
Do you have enough to cover the extra fees associated with buying a home? Two words: closing costs. Lawyer and real estate agent fees, property taxes, home inspection fees, etc., the list goes on. Closing costs may be 1.5% to 5% of the price of your home, so it’s important to set money aside for this often overlooked expense. View the average closing costs in your state.
Still on the fence? If you come back with a pretty even ‘rent vs. buy’ score, try this rent vs. buy calculator
to determine what might be best for you based on the city you want to live in. Should you be a little further along in your home buying research, use this detailed online calculator
to estimate at what monthly mortgage rate renting becomes the better financial option. The information provided in the MoneyKey blog is for informational purposes only. It should not be considered legal or financial advice. You should consult with a professional to determine what may be best for your individual needs.