What You Should Be Asking When Deciding to Rent or Buy a Home
If you’re at the age when your peers are making major life moves — getting married, having kids and buying homes – you might be feeling it’s time to join them. Or you may simply just be at that stage all on your own.
Either way, plenty of young adults are starting to get the home-buying itch. While there are a lot of appealing benefits to homeownership, taking on that kind of debt is not without risk. The decision to rent vs. buy is one you should make carefully.
If you’re trying to figure out your next move, consider asking yourself these eight questions. The answers should steer you in the right direction.
1. What Is my top financial priority?
Buying a home will slow down your ability to make progress on other financial goals. You’ll need to focus on lowering expenses or increasing your income so you can afford a down payment and monthly mortgage payments. (This guide can help you understand more about how to determine your down payment on a home.)
That extra cash will be funneled toward your mortgage rather than paying off credit cards or student loans if you have them. Other financial goals, such as saving for retirement and building an emergency fund, may also have to take a back seat.
Assess your competing financial goals and decide which ones take priority. Buying a house might come first in your book, or perhaps you’ll decide to work toward other money goals before committing to a mortgage.
2. Do I have savings for a down payment & closing costs?
Renting requires some savings – you’ll need enough cash to cover the first month’s rent and the deposit.
To buy a home, however, the minimum you’ll need to have saved is usually 6% or more of the home’s value. Even FHA loans require a minimum down payment of 3.5%, and closing costs add another 2-3% to the costs.
But that’s the minimum; a 20% down payment is better to give you a decent amount of equity and avoid private mortgage insurance.
If you don’t have sufficient savings, you’ll need to focus on saving for a down payment before you’re in a position to buy. And even if you do have savings, it’s worth it to think through the best use of those savings and whether you’d rather allocate that cash to other goals.
3. How do home & rent prices compare?
Housing markets also affect whether it’s a better idea to rent versus buy. If you’re facing sky-high rent prices that climb each year, a mortgage starts making a lot of sense. On the other hand, if you want to live in an expensive area, you could be priced out of buying a home (especially without extensive savings).
4. How long do I plan to live here?
The longer you live in a home, the more likely it is that the financial investment of buying a property will pay off.
If you like your city, have a steady job, and are ready to live in the same space for a few years, buying is often more cost effective, but not always. You may want to crunch the numbers to see how long you’d need to live in a home to break even on your initial costs.
Source: USA Today | Elyssa Kirkham, Credit.com