If you are considering buying a house, the first step is to determine whether or not it really makes sense for you to buy or continue renting.
With home ownership, there are no monthly rent checks or rules about wall paint or pets. And further down the road when you are ready to move on, you may be able to sell that house for a good profit. Renting, on the other hand, places most of the “headache” responsibilities on the landlord (e.g., fixing broken locks, pipes, and major appliances) and you have the freedom to move.
Yes, buying a house will probably be the most expensive single item purchase you ever make, and it may take you 15 to 30 years to pay off the mortgage loan. But if you wait too long, home prices will inevitably go up and you could unintentionally lock yourself out of the real estate market (if housing costs surpass your ability to earn and save money) and you may fall further and further behind.
There is no singular way to solve the “rent or buy” puzzle because everyone’s situation is different ― for some, renting is the best strategy and for others, it is smarter to buy. The key is to determine which is best for you and your current lifestyle.
As you contemplate purchasing a home, consider the following questions:
- Are you financially prepared? In order to buy a house, you will probably need to get a mortgage. In order to get the best mortgage, you will need a good credit score, steady/stable employment, and money for a down payment (20% is generally ideal). It is never a good idea to spend all your money on buying a home ― you will be much better off if you have extra savings and know how to manage your finances.
- How long do you plan on living in your new home? If you can’t commit to staying in one place for five to seven years, then owning is probably not for you (at least not yet). In general, it can take four to six years (or more) for a home to appreciate in value ― if you sell any sooner, you will most likely end up losing money (due to the transaction costs of buying and selling, and/or capital gains taxes).
- Is it the right time to buy? Research home prices in the neighborhood(s) you’re interested in and stay informed about current mortgage rates. Whether it’s best to rent or buy in a certain location will also depend on the conditions of that particular housing market. The more you know, the more money you can save and the easier it will be for you to make smart decisions.
- Are you psychologically prepared? The home buying process can be stressful and there’s a lot of information to grasp. And once you graduate from homebuyer to homeowner, a whole new set of challenges await ― unexpected repairs, disrespectful neighbors, and the everyday responsibilities of maintaining a home. You’re going to have to do your best to be organized, refrain from making snap-decisions, and stay calm.
Use a Mortgage Calculator to Help Make Your Decision
A good way to address the “rent or buy” dilemma is to plug the numbers into a mortgage calculator. This allows you to compare the actual cost of renting to the cost of buying.
The general rule of thumb is that if you pay 35% less in rent than you would for owning, then it is better to continue renting. But keep in mind that owning a home can generate unanticipated expenses for repairs and improvements, and the results of the mortgage calculator should not be your only deciding factor.