Should You Buy or Rent Your Home
Should You Buy or Rent Your Home?
For some people, buying their home makes the most sense, and for others, renting is the best option. Whether renting is better than buying depends on many factors, particularly how fast prices and rents rise and how long you stay in your home.
Mortgage rates and home prices are at record lows and rent prices are on the rise according to the website .
Rent in the U.S. has gone up by an average of 5.4 percent over the last 12 months. The price to rent has gone up because of so many people not being able to qualify for mortgages and homeowners who lost their homes to foreclosure.
The prices of homes have risen by 0.3 percent in the last 12 months, but compared to the rise in rental rates in the last year, the rise in home prices are small.
Trulia’s chief economist, Jed Kolko said “With rents rising faster than prices in most markets, buying a home is getting even more affordable relative to renting.”
Advantages and Disadvantages of Renting or Buying a Home
To decide whether to rent or buy and what will make the most sense for you, here are some important questions to consider, when buying a home.
• How Long Do You Expect to Live There?
If you are considering buying a home, be prepared to stay in it for five to seven years or longer in order to recoup the cost of buying. If you can’t make the long-term commitment, you’re probably not ready to buy a home.
• What Are The Costs of Buying?
Check online to get an estimate of rental costs and purchase costs for your area, and check with a realtor to learn about neighborhoods and homes that you might want to purchase.
• What Are Your Future Plans?
It’s sometimes hard to know where you will be in 5 years so carefully thing about your goals for your career and for your personal life. If there are changes in your career that may cause you to have to relocate, then renting may be the best option for you. Make sure you want to own an investment property.
When considering the size of home you buy make sure that it is comfortable for you or a family. Know whether or not your housing budget can accommodate a reduction in income if one spouse stops working. Also make sure you remember to budget for the costs of things you like to do, like golfing, skiing etc.
• Do You Have The Ability to Finance a Home Purchase?
If you’re considering buying a home, your first step should be to meet with a lender to determine whether you qualify for a mortgage and, if so, how much you can borrow. You need to be able to qualify in these areas:
• Credit Score. You need a credit score of 620 or higher to qualify for a mortgage. If you have a credit score of 740 and above you can get lower interest rates.
• Income. You must prove that you have a steady income and can afford to repay your mortgage.
• Debt-to-Income-Ratio. Your lender compares the minimum payments on all outstanding dept to your gross monthly income. Ratio’s varying by lender; most will not go above 41% to 45% for an overall dept-to-income ratio.
• Assets. You need to prove you have the savings to pay for a down payment and closing costs as well as have some cash reserves in the bank.
If you fall short on any of these things, you may be better off renting until you can improve your credit score and save more money.
Pros & Cons of Renting or Buying
Advantages of Renting
• No Maintenance Is Required. If anything breaks, you just call your landlord.
• It’s Easier to Move. If you are not settled in your career or could or need to relocate in the near future, it’s much easier to switch to a month to month lease than it is to sell your home.
• You Can Avoid Owning a Depreciating Asset. There is no guarantee that your home will increase in value over time.
Disadvantages of Renting
• Your Monthly Payment Can Increase. Rents have been rising, so a increase in your monthly housing payment is possible as soon as your current lease ends.
• You Don’t Build Equity. When you rent, you won’t have an asset to sell when you are ready to move.
• You Don’t Receive Tax Benefits. Homeowners can deduct their mortgage interest payments and their property taxes from their federal income tax, which reduces the final cost of your home. Renters cannot deduct any of their housing expenses.
• You Can’t Paint or Remodel Without the Owner’s Approval. If you want to paint your apartment or make other changes, you have to get the landlords approval. When appliances need changed, it’s the landlord’s choice of what goes in.
Advantages of Owning a Home
• You Can Build Equity. Historically, homes rise in value anywhere from 4% to 6% per year. Even if your home doesn’t increase in value, though, you’ll be building equity as you pay down your mortgage as long as your home maintains its value.
• You Can Take Advantage of Tax Breaks for Homeowners. Homeowners can deduct their mortgage interest payments and property taxes when they itemize their federal income taxes. These deductions offset the cost of your housing.
• Your Housing Payments Will Stay Stable. With a fixed-rate mortgage, your principle and interest stay the same for the time of the loan. But your homeowners’ insurance and property taxes can change.
• You May Be Able to Use Your Home as an Investment. If you choose to buy a home that could make a good rental property in the future, you could rent it out instead of selling so that it could bring in income.
• You Can Settle in a Community. When you buy a home, you are more likely to get involved with the community and get to know your neighbors, because you know you will be there for a few years.
• You Have the Freedom to Decorate as You Please. One of the best things of owning your home is being able to decorate and change your environment to what you like.
Disadvantages of Owning a Home
• You Have to Pay For Your Own Maintenance. You need to set aside money for unexpected expenses, like a broken window or a appliance breaking.
• Your Home Is an Illiquid Asset. If you need to sell because of a job relocation or change in your circumstances, you may not be able to sell your home as fast as you want or get as much money out of it.
• You Must Pay Property Taxes. Property taxes go up, making your home less affordable.
• Your Home Could Lose Value. There is no guarantee your home will increase in value over time.
• Buying a Home Requires a Cash Investment. You need to
use up your savings for a down payment and closing costs and for other expenses. That cash won’t be there for other investments.
• Homeowners’ Insurance Is Mandatory If You Have a Mortgage. As renter, renters insurance is recommended but not required, but your lender requires you to insure your home. Usually you have to pay the insurance premiums along with your mortgage payment.
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