It’s not easy to decide whether to rent or own your home. Of course, there can be a lot of pride and satisfaction in the idea of owning your own home, but is it worth taking on all the maintenance, responsibility, and cost?
The binding commitment to taking care of a house can be enough to make someone want to rent a 700 sqft. apartment for the rest of their life. And is that even a bad thing? It’s cheaper; you can save more money, and you don’t have to mow the grass every weekend. On the other hand, your rent money usually does not help you build credit and you won’t have any equity in your rented space. You probably aren’t allowed to modify your space, either.
Determining whether you should buy, or rent depends on your financial picture and many external factors such as where you live. Start by asking yourself the following questions:
1. Are you out of debt?
If you have any credit card or student loan debt, pay it off before taking on more debt.
2. How much have you saved?
Determine if you have enough to cover a down payment (10-20% of the home value) and closing costs (typically between 2 and 5%). You will also need to have an emergency fund set aside to cover unexpected expenses.
3. Will your house payment be less than half of your take-home income?
Missing even a single house payment can put you at risk of foreclosure and can make it a lot harder for you to make other big purchases (homes, cars, etc.) in the future. Falling behind on mortgage payments can kill your credit score. If your mortgage is going to be half or more than half of your monthly income, you may not be in the best position to buy.
4. Do you plan on staying in the same location?
If you sell your house after living there for only two years, you’ll have to pay a hefty tax penalty. Plus, in less than two years, your house is unlikely to gain enough value for it to make sense to sell your home. It all depends on the real estate market in the area, but it is more than likely not a smart financial decision to buy your home unless you know you will be there for a minimum of two years.
If you can truthfully answer yes to these questions, buying a home may not be a bad idea. If you answered no, sticking to renting for a little while might be the safe bet.
Side note, if you answered no to these questions but you still want to buy because you found a great deal, DON’T BUY. You should never buy a house based on the market because there is no way to know if the market will go up or down. Be smart, and don’t gamble on your future!
Buying a home is not a process you want to rush. It is likely to be the biggest purchase you’ve ever made! Therefore, it is not something to be taken lightly. Be sure to weigh all the pros and cons before deciding to buy a house.
Renting is a great way to save money. Over time, renting can be cheaper than owning; however you will never be able to sell it, so all the money you put into it is gone. Renting is likely the better choice if you find yourself in any of the following situations:
Just like buying, renting a home or apartment comes with its own set of pros and cons.
There are many things to consider before deciding to buy or rent. The answer is not the same for everyone. If you wanted to buy a home in downtown Los Angeles, I would probably think you are crazy or a deca-millionaire, nothing in between. On the other side, if you could buy a house in a growing rural area outside of a city, but you are wasting money renting, I would probably advise you to buy a home you can afford and let the equity and appreciation grow.
Understanding your financial picture is essential but deciding whether you should buy or rent is not something you have to do alone. Buying a home is not something to take lightly, so make sure you do your research before jumping the gun.