Rent or Buy? Hereâs How to Decide
Buying a home is a major milestone and life goal for many people. The common sentiment is that rent is throwing money down the drain, while buying a home is an investment that builds equityâbut the truth is more complex.
Personal finances, lifestyle, goals, location, and the economy all play a role in whether or not itâs a good idea for you to buy a home right now. You control some of these, such as your desire to stay in one place for an extended period or not. But others, like interest rates and home prices, are outside of your control. If youâre on the fence about buying a house, take a close look at each of the following factors before making a decision.
Stability vs flexibility
The choice to take on homeownership has as much to do with lifestyle as it does with your finances. In fact, even if you can afford to buy a home, you should only do so if youâre ready for a major commitment. Whyâs that? Because you purchase a home, youâll need to stay in it for at least three to five years to build equity.
Why is equity important for homeowners? Because it represents the amount youâll get back when you make a home sale. Equity is the difference between the value of the home and the amount you still owe on your mortgage, and waiting three to five years before moving gives you the chance to pay down your mortgage while the value of your home appreciates. The bigger the difference, the more money youâll make on the sale.
What does this mean for your lifestyle? If you buy, you shouldnât plan on changing locations for a few years after making a home purchase, because youâll need to stay in the same house. This makes homeownership a great choice for someone looking to put down roots, but less great if you like to move every time your lease comes up.
Also, you should only buy a home if you have a stable career, and you plan on staying in it for a while. Youâll usually need to show two years of employment in the same position to get approved for a home loan, and to make sure you stay current on your mortgage payments, itâs a good idea to not make any major career changes during the first couple years of homeownership.
Personal finances and cost
Once youâve decided that homeownership is a good fit for your lifestyle, itâs time to consider the costs. Buying and renting have different costs depending on the economy, housing market, and where you liveâbut you can always expect to spend more on buying than renting in the first year. Remember that a home purchase is an investment. Money that you put into it you can generally expect to get back, either by eventually owning your home outright or when you sell in the future.
To buy, youâll usually need 20% to put down for a conventional mortgage, plus 3-6% of the purchase price for closing costs. Your monthly expenses will include the mortgage payment which includes interest, homeownerâs insurance, home maintenance and repairs, and HOA fees (if they apply).
When you rent, your upfront expenses arenât as high. You usually need a deposit to move in, equal to a couple monthsâ rent. Your monthly expenses include the rent and renterâs insurance, which costs less than homeownerâs insurance because it covers your belongings, not the structure itself.
Which is cheaper? That depends on a variety of factors, including mortgage rates, the housing and rental markets where you live, and the overall state of the economy! When mortgage rates are lower, buying a home can give you a significantly smaller monthly payment than rentingâbut the cost of entry into homeownership is almost always higher.
Which is right for you? Talk to an expert real estate agent or lender to decide.
Property customization
Want the ability to modify and improve your property at will? Homeownership is for you. When you own a home, you can paint, renovate, and update when you want, how you want. Youâll have to cover the cost, but you have total control over the outcome. Some structural modifications such as square footage add-ons require a permit from your local authorityâbut once you make the improvement, the benefits such as more space and additional home value are all yours.
Any improvement you make to a rental property must first be approved by the landlordâeven small details like changing the paint. Landlords may not be willing to let a tenant make changes, and if they are, theyâre not likely to cover the cost. Additionally, any improvement you make will then belong to the landlord, and when you move out, theyâll enjoy the added value without having paid for the investment.
There are also pros and cons to homeownership versus renting for repairs and maintenance. As a homeowner, youâre 100% responsible for your home maintenance, and if you donât keep up on it, your home can actually lose value. The upside? You determine when and how it happens. Thereâs no waiting around for a landlord to hire someone to make repairs, and you get to choose the quality of the material and who does the work.
When youâre renting, your landlord is typically responsible for repairs and maintenance on the property. You wonât have to foot the bill for a new water heater or a roof repairâbut you will have to accommodate the landlordâs schedule. Good landlords will get repairs done quickly, but working around someone elseâs schedule can cause inconvenience and frustration.
The housing market
If youâve decided to buy a house, the next thing you need to determine is if you should buy a house right now. If your finances are in order and you know that buying a home is for you, consider the real estate market where you live and compare it to the rental market.
In the country overall, rental prices and home purchase prices have gone up in the last several yearsâbut now, home purchase prices are starting to come down. That means it could be a good time for you to buy.
Not sure? Get in touch.
Do you live near us?
Every local real estate market is different, and weâre experts in ours. If youâre thinking of buying a home around here, we can help you decide if now is the right moment.