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On The Money –
A Financial Wellness Series
On The Money –
A Financial Wellness Series
What to Think About Before You Buy
Buying a House
Renting
One More Word on Buying vs Renting
The Bottom Line
Before you buy a home, you need to make sure your finances are in order. That starts with minimizing debt and having an emergency savings fund (read more about these in our Basics of Personal Finances blog). You will also need money for a down payment and monthly mortgage payment. A good rule of thumb is to keep your mortgage payment around 25% or less of your take-home pay. And finally, make sure your income is stable to cover these and other on-going expenses.
Owning a home can be a wonderful thing but the associated costs can add up quickly. Make sure you also consider your mortgage principal and interest, property taxes, homeowner’s insurance, Private Mortgage Insurance (PMI) and potential homeowners association (HOA) fees. Use this calculator to see what your costs could be. It’s easy to get in over your head by buying a home that exceeds your financial comfort zone, which may make renting a better choice.
Here are some other considerations you may think about before buying:
With home ownership you’ll need to keep up with the maintenance of the entire property: yard care, mowing the grass, replacing air filters, major and minor repairs, etc. Decide if these are things you’ll do yourself or hire someone to do for you. When you rent many maintenance issues are taken care of by the landlord.
Do you need to live in an area with good schools? How long do you want your commute to work to be? The price of a home may vary by location, so consider what you can afford when making a decision. However, if you don’t want to compromise on these, renting may be a more affordable option than buying.
If you plan on moving in a few years, it may not make sense to buy. If you’re in the military or your job requires you to move around, it could be smarter to rent. In most places, you’ll need to stay in a house for two to three years to make buying worth the upfront costs.
When you pay rent, that money doesn’t build any equity. But when you pay your mortgage, your money goes toward owning your home. And once your house is paid off, it’s yours!
Your home will likely increase in value over time depending on the market and how well you take care of it.
Many costs of owning a home like property taxes and mortgage interest are tax deductible. Make sure to check with your tax advisor for details.
As a homeowner, you can decorate how you like, inside and out, have a garden, plant flowers and more. No landlord can stop you.
Having your own house means not hearing the neighbors upstairs or through the apartment walls.
Want to go overseas for a few months? Or need to relocate because of work? Leaving your house isn’t as easy as getting out of a lease. You’ll have to rent out or sell your house, or else make arrangements for it to stay vacant for a long time.
Homeowner’s insurance is more expensive than renter’s insurance. You may even have to add flood or earthquake coverage, depending on where you live. Then there are property taxes, possible HOA fees, and typically, higher utility bills.
A leaky roof could be a full-on crisis that’ll take dipping into your emergency fund to fix (or replace with a whole new roof). But when you rent, a leaky roof just needs a bucket under the leak until your landlord fixes it.
This takes time and hard work. You’ll need to have 10-20% of the home’s purchase price for a down payment plus an additional 2-5% in closing costs.
When you rent, you don’t have to stay in the same location. Plus, it’s typically easier to get out of a lease than sell a home.
If the stove breaks or a pipe bursts, you don’t have to make the repair – call the landlord! One of the biggest perks of renting is not worrying about surprise repair costs.
Renter’s insurance is significantly cheaper than homeowner’s insurance. Also, your starting costs are lower since you only pay a small security deposit instead of a big down payment.
Many apartment complexes come with a pool, community club house, fitness center, and more. These benefits are included in your rent and don’t cost extra.
No matter how affordable things are when you first move in, inflation, competition and rising property values can cause your rent to go up year after year.
No tax deductions. No equity. No rising property value. However, renting is not a waste of money; you’re paying for a place to live!
New flooring would look great, but your landlord may not approve. You may even have to ask for permission for simple changes, like paint colors.
While many people consider owning a home a part of the American dream, you need to decide if it’s right for you right now. Depending on your stage in life, there are many reasons that renting may be a better option.
However, if you rent for decades, you could end up paying more than if you’d bought a house in the first place. That’s because your house payment will stay the same while rents go up (unless you have an adjustable-rate mortgage, in which case your mortgage goes up too).
You found a nice house at a good deal, but you have several debts you’re paying off and don’t have much savings. You need to prioritize your financial stability over immediate gains. Rushing into a purchase based on a low price can lead to financial strain. Don’t worry – another good deal will come along. Waiting is a wiser long-term strategy.
Don't rush into a huge purchase just because your friends or family say you should. It may seem like buying a house is the “grown up” thing to do, but having your finances in order first is the ultimate in being an adult! Depending on your situation, homeownership isn't always the best financial move. Wait until you're truly ready – financially and emotionally
We already talked about the upfront costs associated with buying a house. Plus, if you already know that you’ll be moving in the short-term future, you may not have enough time invested to reap the benefits of increased value or built equity. Make sure you’re ready to stay for a while before you buy.
If you have student loans, credit card bills or any other debt to pay off, consider renting an apartment. Pay off your debt while you save with cheaper renters insurance and the landlord paying for maintenance. But remember, if your rent is taking too much of your paycheck, find a cheaper apartment so you have a better opportunity to get out of debt and save.
Buying a house is a big commitment. Make sure you’ve carefully weighed all the factors of renting versus buying before deciding. If you just got married, graduated from college, or aren’t sure where you want to live long-term, your best option may be to rent for a while. Big investments, like buying a home, need to be the right fit for your needs.
Still need help deciding? Use this calculator to help you find which option may be better.
Next month in our Financial Wellness Series: The Basics of Investing
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