Owning vs Renting (Which Is Best?)

Is it better to rent or buy a home?  Virtually all adults ask themselves this at some point as they form their goals and plan for the years ahead.  Owning and renting each have their advantages, but what is best for you depends on your circumstances.  Before you decide, here are some things to ask yourself.

How Long Will You Stay In The Home?

Each market is different, but whether the time you plan to spend in the house warrants its purchase can be predicted.  In general terms, it takes four to seven years to break even on a home (where there has been enough appreciation to pay back the cost of the transaction and cost of ownership).  If you are thinking about buying a home and selling it in two years, it is very unlikely that buying will be cheaper than renting.

Do You Think Of Or Need Your House As An Investment In Your Retirement Plan?

Americans are used to their homes being a store for wealth they can liquidate in retirement as part of downsizing their lifestyle.  Gallop has reported that more Americans named real estate as the best long-term investment, over stocks, gold, savings accounts/CDs, and bonds.  A cautionary note though, although home prices have recovered from their pre-2006 market slump and continue to rise, the price of your home can still fall.

Are You Financially Ready?

Owning a home is a financial commitment that requires planning how homeownership will fit into where your life is headed.  Ask yourself what your budget is and if either buying or renting would require you to stretch your finances.  A frequent mistake of first-time homebuyers is comparing a month's rent to a month's mortgage payment.  There are many additional fees necessary to include to make a fair comparison: principal, interest, property taxes, property insurance, homeowners' association fees, and maintenance.

Are You Prepared For The Down Payment?

This is the lump sum payment that funds your equity in the property (how much of the property you own).  Down payments vary, 20% is preferred and gets the best rates.  There are some loans that allow down payments as low as 3%.  Sometimes, relatives contribute to down payment.  If you have an opportunity,, take a gift rather than a loan because lenders will add that debt to other monthly obligations and potential mortgage payments to determine your debt-to-income ratio.

Can You Afford The Monthly Mortgage And Its Components?

Generally, a mortgage includes loan principal and interest, amortized over the life of the loan, plus homeowner's insurance and property taxes, which are pro-rated.  These items can affect the monthly loan-only payment by several hundred dollars.

Are You Emotionally Ready?  Can You Handle The Stress?

A big factor to consider when buying a home is stress.  The Holmes and Rahe Stress Scale, a landmark stress study, ranks many events that go along with buying a home in the top 43 most stressful circumstances in life.  Four events are specifically home-related: change in financial state (#16), large mortgage or loan (#20), change in living conditions (#28), and change in residence (#32).  If someone has recently made other life changes such as marriage (#7), switching careers (#18) or having a child (#14), it might be wise to postpone buying a home.  Stress overload can lend to missed payments, which can destroy your credit or even make you lose your home.  It's better to rent if your life is in flux and buy when your stress levels are lower.

Are You Ready For Commitment?

Are you ready to make lots of decisions, from picking a real estate professional to picking paint colors?  Are you confident enough to choose a neighborhood where you believe home values will continue to appreciate and that will serve your needs (proximity to schools, shopping, recreation, etc.)?  Are you ready to devote the time and attention to maintain a home (leaf raking, grass cutting, appliance maintenance and repair, etc.)?  Taking care of your investment can be gratifying, but only if you are prepared.