It’s a big question with no easy answer: Should you keep renting, or is it time to think about buying a home?
One of the major benefits of being a homeowner is building equity with each mortgage payment, instead of putting money into your landlord’s pocket.
But that doesn’t mean buying is always the best choice—as a renter, you enjoy more flexibility and avoid many of the costs that come with homeownership.
“This is an extremely personal decision,” says David Parsons, broker/owner of Re/Max North Professionals in Burlington, VT. “For those that want the flexibility to move quickly, have no desire to maintain a property, or need to save up money before making a purchase, renting is worthy of strong consideration.”
But there’s more to consider. We understand the magnitude of your rent versus buy quandary, and we’re here to assist.
Here are seven questions to ponder to help decide what’s right for you.
1. Will you even qualify for a mortgage?
Unless you have enough money in the bank to buy a house with cash, you’ll need a mortgage. Before you get too deep in daydreaming about your new home, reach out to a lender to see if you qualify for a loan. They can also tell you how much of a mortgage you qualify for, which is determined in part by your debt-to-income ratio.
“Job stability, credit history, and savings are some of the important factors used when qualifying for a mortgage,” says Tim Ross, CEO of Ross Mortgage Corp. based in Troy, MI.
If you qualify for a mortgage, buying a home might be a good next step. If not, you should first spend some time shoring up your finances.
“Qualifying for financing is a critical part of the home-buying journey. So if you have challenges in this realm, renting may be a good alternative,” Ross says.
2. Can you afford the closing costs?
So you’ve saved up enough for a down payment—congratulations! But beware: If you want to buy, there are more upfront costs involved.
“Buying a home involves more money out of pocket than just the down payment,” says Michele D. Hammond, a Chase private-client home lending adviser. “Closing costs are used to pay for items such as appraisals, inspections, and much more. These can amount to up to 3% or more of the final purchase price.”
When you’re buying a home with a six-figure price tag, 3% or more can mean many thousands of dollars that you’ll need to pay upfront, in addition to your down payment.
3. Can you afford the neighborhood?
Some costs—such as the down payment, closing costs, home inspection and appraisal—are just the price of admission to homeownership. But other real estate expenses depend entirely on where you choose to buy.
“When considering the overall cost of homeownership, the price of insurance and property taxes will vary based on community and location,” Ross says.
You can check with your local tax office or assessor to confirm the property taxes in your area and calculate what you can expect to pay based on a home’s assessed value. Keep in mind that property taxes vary widely by state and city.
4. How long do you plan to stick around?
If you’re buying a home, you should plan to stay there at least two to three years if you don’t want to lose money, Ross says.
“Remember, there is a cost to buy and sell a home,” Ross says.
When you’re buying, you have closing costs and a down payment. When you’re selling, you’ll need to factor in the real estate sale commission, which is typically 6% of the sales price. Considering that homes appreciate from 4% to 5% a year, he says, you might need to live there for a few years to cover the cost of a sale.
“If you’re confident you’ll stay in place for five to 10 years or more, that’s when you’ll find the prospect for meaningful wealth creation,” Ross says.
If you’re not sure you can commit to a home for at least 24 months, Ross recommends renting and setting aside any money you’ve saved for a down payment and closing costs. It’s better to save that money in the meantime and have it available when you’re ready to buy a home.
5. How important is the freedom to renovate?
If you’ve got the itch to tear down walls, try your hand at tiling, or experiment with a bold new wallpaper, you’re better off buying than renting (unless you have a very open-minded landlord). Owning a home gives you the freedom to renovate and decorate to your heart’s content.
“For those who greatly value the concept of ownership or plan on putting sweat equity into a property, ownership may be a better path,” says Rich Gardner, broker/owner of Re/Max North Professionals in Burlington, VT.
6. Are you up for the maintenance?
One major perk of being a renter is that your landlord is likely responsible for most of the maintenance and chores that homeowners have to deal with.
“When one goes from renting to owning, they are responsible for maintaining the property, which can be more expensive than many realize,” Hammond says.
From standard upkeep like replacing smoke detectors and shoveling snow to major issues like pipes bursting and foundation problems, homeownership comes with a long to-do list, and the maintenance can be as costly as it is time-consuming.
7. Are you comfortable with some market volatility?
The real estate market is hot right now, but it’s not guaranteed to stay that way.
“The housing market fluctuates, and although it has historically been an excellent investment in the United States, house prices do go down sometimes,” Parsons says.
“If you’re uncomfortable weathering inevitable ups and downs of any market, renting may provide more peace of mind,” he adds.
Article by Lauren Sieben on realtor.com