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It was once taken as a given that Americans would always buy a home provided that they had the means. Once a person began a career, started a family, and succeeded in putting some money aside, there was no question that he would soon look to become a home owner – to achieve the American dream.
But in light of the recent housing bust, mortgage crunch, and overall downturn in the economy, many people are suddenly realizing that renting a home may be advantageous in certain situations, even if one could afford to buy. Is renting or buying the right approach for you? If you’re not sure on whether you should rent or buy, here are six questions that may help you determine an answer:
What can I afford?You first want to ask yourself whether you can afford a house in the first place. Typically, a new owner needs to pay a down payment of 5 to 20% of the home’s purchase price. You also would need to pay closing costs (around 5%) and budget some extra money for various maintenance, tax, and transfer expenses. If you’re looking to buy a $200,000 home, then, you’re going to likely need at least $30,000 on hand and up front. Without savings of that magnitude you may have no choice but to rent.
How long do I plan to stay in my residence?The time you plan to live in a home has a tremendous impact on whether renting or buying is more economically feasible. In most areas of the country and in most financial situations, renting a house is advantageous if the occupants plan to stay for only a few years at most. If, on the other hand, you are looking to put down roots somewhere for the next 15 years, buying is often the right way to go. The New York Times offers an excellent online calculator to help you gauge the timeframe effect.
Will a home help me build equity or debt?One of the main arguments in favor of home ownership is that it allows an individual to build equity. Unlike with renting, where the money you pay every month is never seen again, the mortgage costs incurred from home ownership can then be recouped when you sell down the road. But keep in mind that, if you don’t plan to stay in your house long or if your mortgage payments are minimal, you may find yourself simply paying off the interest on the mortgage instead of putting equity in the home itself. Ask yourself, then, what kind of mortgage payments you are capable of making. Your monthly payments should never exceed 1/3rd of your monthly income.
How will my taxes compare?Owning a home can translate into substantial tax benefits – both when you are paying off your mortgage and when you someday go to sell your house. But home ownership also comes with annual property taxes that could offset any other tax benefits, especially for lower income owners. As such, don’t forget to assess the tax situation whenever you are considering a purchase.
Where do I want to live?Location, location, location – that’s what real estate is all about, and the decision of buying or renting a home is no exception. Several reports have analyzed the markets in different cities to assess whether they are more renter-friendly or owner-friendly. In some places, a highly competitive rental market drives up prices in a way that is not matched on the home ownership front. In other places the opposite is true. Make sure, then, that you know how the two markets compare in the location of your choosing.
What kind of investor am I?
Buying a home is a significant investment. For most people, in fact, it’s by far the single largest investment they ever will make. If you’re an extremely cautious investor, you may worry that your home’s value won’t increase over time and you might instead decide to invest in bonds and CDs – and to rent rather than buy. On the other end of the spectrum, some investors don’t like the thought of tying up so much money in a house. They’d rather put that money towards stocks, mutual funds, and other more liquid investments. Along these lines, it is usually the middle-of-the-road investment mentalities that prefer to put money into a house.
These are six of the major questions to ask yourself when trying to decide whether to rent or buy. While it was once a given that people rented during certain periods of their lives and bought during others, that attitude is no longer the case. These days, it is ultimately most important that each person consider their individual plans and needs in order to make a fully informed decision.
Jim Wang, the personal finance guru behind Bargaineering.com is actually a longtime, well-respected, and famous member of the FatWallet community. Jim is one of the experts in the finance forum and has been sharing knowledge and helping people out for almost 10 years. You may also connect with Jim on Google+.
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