5 Questions to Ask Yourself When Deciding on Renting vs. Buying a Home
Both renting and buying homes have their advantages and disadvantages. One requires paying rent and requires less hassle when it comes to upkeep. The other is often a good investment but can bring on a lot of headaches. To help you decide which option is right for you, we've put together a list of a few questions to ask yourself when deciding on renting vs. buying a home.
While you're reading and answering these questions, consider writing down your answers in a notebook or take notes in a document on your computer. Then, make a "pro and con" list of renting vs. buying to see where your personal needs and current financial situation could best benefit.
What's Your Financial Situation?
First and foremost, what's your financial situation? Can you afford to buy a house or does renting make more sense right now while you save for a home?
For example, it's typically only a good idea to purchase a home if you have a decent amount of savings and only a moderate amount of debt. Money gurus like Dave Ramsey recommend you save up to 25% of a house's sale price to cover down payment, closing costs, and moving expenses.
However, the amount of money you need to buy a house depends on a lot of factors, like the cost of the house and the interest rate your bank will give you, plus any deals you might be eligible for if you are a first-time home buyer. The best way to find out what you qualify for is to meet with a mortgage broker at a bank. There is generally no fee to meet with someone but ask first to be sure.
If you're not sure how much you can afford in rent, try using a rent affordability calculator, which will take into account your location, your monthly gross income, and your monthly debts to calculate what you can afford.
How Long Will You Live in the Same Area?
This is a very important consideration when trying to decide between renting and buying a home. One general rule is that you should plan on staying in a house that you purchase for five years in order to have it make sense financially.
First off, you have to consider closing costs when you buy a house. In addition, most mortgages having you only paying interest in the first few years of home ownership. So, unless you move into an area where housing prices are skyrocketing year over year, you'll have little chance of making much, if any, money on your house before five years is up.
Of course, there are always exceptions (like if the house you purchase you plan to fix up and rent out), or if you are able to pay more than your mortgage to get to the principal more quickly, but these aren't he norm.
If you aren’t planning on staying more than five years, then renting is usually the best choice. Moving in and out of a rental home is typically faster, less stressful, and easier on your bank account.
What's the Real Estate Market Like in Your Region?
Houses prices vary all across the country and from city to city. In a large city like New York or San Francisco, very few people can afford to purchase a house or condo because the real estate market prohibits it. In fact, the 2021 rental season is already off to a big start, up 13% over the same time in 2020.
In such cities, the more affordable housing options are usually apartment rentals.
If you can afford to commute from outside a large city, then the housing is probably more affordable in the suburbs.
The best way to answer this question is to look at the real estate market in your city.
Compare the costs of the average mortgage payment in your area to the average rental payment. There are a lot of free housing market reporting tools you can find online, like this one from Rocket Homes.
How Much Privacy and Independence Do You Need?
Of course, not everyone has the luxury of prioritizing things like privacy and independence. However, if these perks are important to you, buying a home will almost always be advantageous. For those who want privacy, being able to own a single-family home instead of sharing an apartment building can be very enjoyable.
Another advantage of buying is that you no longer have to comply with your landlord's rules. This can provide a lot more flexibility. You can do things like pick your own landscaping, get a pet, paint walls, decorate, and make renovations as desired. If these sorts of activities are especially important to you, prioritizing a home purchase can be a good idea.
How Much Home Maintenance Do You Want to Manage?
Another important question you want to ask yourself is how much work you want to put into your living space. As a renter, you usually won't have to do too much more than clean your rooms and take out the garbage. If you have a leaky faucet or your bushes need to be trimmed, you can call your landlord.
As a homeowner, you'll have to take care of everything. Your leaky sink, your lawn, a water heater that breaks, snow that needs to be removed – it's all on you. That's not only time you'll have to allot for taking care of the task, but also there is a lot of cost associated with the upkeep of your house. If you're more of a hands-off person, then renting could be a better choice here.
Weighing the Pros and Cons
Now that you know the important questions to ask yourself when considering renting vs. buying a home, you can make a "pro and con" list. When making your list, consider the following:
- A big perk of buying a home is that it lets you build equity. Each mortgage payment on the principal allows you to own a tiny bit more of your property. By the time you pay off your home (and the value of your home increases over time), you'll have a nice chunk of equity that can be helpful if you retire, encounter financial emergencies, or want to make other large purchase.
- When you buy a house, you have a lot of closing fees to pay at first, and you can end up with pricey maintenance costs, too.
- When you sell, you also have to pay for an agent's commission and other expenses.
- People who want to see returns in just a couple of years may find it better to rent while adding more money to retirement funds, stock portfolios, or earning money in other ways.
Ultimately, buying a home can be a great decision if you have a good income and plan on staying in the same place for more than five years. Renting, on the other hand, can provide much-needed flexibility and save you money in the short term.
Whatever housing situation works best for you, know that Xact® is here to help should you run into any financial emergencies. Whether you have a leaky pipe in your new home or a broken car that makes it hard to pay rent, we have plenty of loan options that can help*.
*The Xact® Loan is an installment loan originated and funded by Capital Community Bank a Utah Chartered bank located in Provo, Utah, Member FDIC.