If it’s time to find a new place to live, you’ll likely be asking the age-old question: Do I rent or buy? Below are some important questions to ask:
Can I Afford to Buy a Home?
If you’re debating between renting and buying a home, the first question you should ask yourself is if you can afford a home.
Remember that buying a home doesn’t just mean having enough money for the typical 20% down payment, but for other costs associated with buying a home, like your mortgage payment, property taxes, homeowner’s insurance, utilities, maintenance, etc. It’s also important to know what your closing costs will be and make sure you have that available.
If you can afford to buy a home, can you afford the costs of homeownership without being “house poor” (spending so much money on your home that you have little left for anything else)?
Mortgage lenders as well as other creditors recommend using the 28/36 rule, Using this calculation, homeowners should spend no more than 28% of their gross monthly income on housing expenses and no more than 36% on paying all of their debts (car loans, credit cards, student loans, etc.). There are calculators (such as those on Calculator.net, Realtor.com and Zillow) to help you determine how much house you can afford.
If you can afford to buy, but you’re still not sure whether renting or buying is right for you, there are still plenty of questions to ask.
Do you plan to stay put for at least five years, or is it possible you may need or want to move?
Experts say that if you aren’t planning to stay put five years or more, flexibility considered, you’re probably better off renting (more on that below). Think about your career, family and personal goals and where you see yourself in five years (or 10). If you plan on expanding your family, you will need a place with enough room for them. (Some apartment owners don’t allow pets, so that’s something to keep in mind.)
An advantage of renting is having the flexibility to relocate when you need or want to (taking into consideration your lease, of course). However, this flexibility comes with the chance that a landlord could increase your rent as you re-up your lease.
That said, if you like the benefits of home ownership, like being able to deduct your mortgage interest payments (consult your tax advisor), additional privacy, boosting your credit score, and/or having a bit more room for a large family, there is a mortgage option well suited for those who don’t have long-term plans of staying in an area: the adjustable rate mortgage (ARM). ARMs have an initial fixed rate period, which vary by mortgage. For example, a 5/1 ARM has a fixed rate for the first five years. After that, the rate can increase or decrease based on the terms of the mortgage.
If you get a favorable (in this case, low) interest rate on an ARM, you’re guaranteed that rate for the fixed-rate term. And if you’ve purchased a 5/1 mortgage, and only plan on staying for five years, this could be an option for you.
It’s also a good idea to run some calculations on whether buying or renting will be less expensive over a period of time. Both Zillow and SmartAsset have “Rent vs. Buy” calculators that can help you determine how many years it will take before buying is less expensive than renting.
Will you be able to take care of the maintenance required in owning a house (inside and out)?
A key advantage of renting for many people is fewer maintenance hassles and expenses. If you’re not a do-it-yourselfer or don’t want to spend the money on hiring repair professionals when something breaks, renting may be preferable.
The downside to this, however, is that you have less freedom when you rent to remodel. You probably won’t be able to paint the walls a different color or install carpeting. Renting comes with more restrictions in general than owning a home. (Be aware that owning a condo or townhouse can also come with some stringent restrictions.)
If you lose your job, do you have enough savings to pay your mortgage for a few months or longer?
Experts say it’s wise to have at least three months’ worth of living expenses in savings so you have a cushion should you lose your job. However, some might say that the stakes are higher when you own a home: if you get behind on your mortgage payments, you risk losing your home to foreclosure. Of course, if you’re renting, your rent will still be due even if you have no income, but it could be easier to relocate to a less expensive place if necessary.
Do you want a home even if the property value decreases?
Real estate is a significant asset. That’s one of the key advantages of buying a home. You’re not just paying money toward someone else’s asset, as you are when you’re renting.
However, no home is guaranteed to increase in value. Ask yourself what would happen if market values decreased. Would you still be happy that you bought your home?
If you’ve decided you want to buy, we’ve put together a comprehensive home-buying guide to help you every step of the way, from how to shop for a home within your budget to learning more about the pre-approval process. Visit the guide here.
If you’re not ready to buy yet but it’s something you want to do eventually, we’ve also got steps you can take to save for a down payment. Or if your credit score could use some improvement, you can work on that as well. The better your credit score is, the more options you’ll have when you’re ready to get a mortgage.
It’s only natural to have a lot of questions when making a decision about where you’ll hang your hat. And while we’ve provided just a few of the resources here, some of the most important work begins with answering the questions listed above.
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