Deciding where to live is a deeply personal choice. We have our reasons for why we move to a new area or a new home. Whether it is for more space for a family or a new job, deciding whether to rent or buy in a new location has inevitably crossed your mind. It is a significant topic, especially for the American populace, as the American dream includes owning your own home.
The decision to rent or buy a home is a large decision, no matter which you choose. Both have a lasting impact on your financial situation and the choice between them, given your current financial status, requires two considerations with multiple levels of questions to be answered. You should consider the financial consequences as well as the personal consequences of making this decision. For every person, there is a different scenario, but both should be considered in every case.
Financial Considerations
While we would all like to have the right home and not have to worry about how much it costs compared to the amount of money we make, reality has to factor into the conversation. When deciding between renting and buying, the decision should be a balance of reality and aspirations, whether you can really afford what you want.
Affordability
Renting and buying both cost money. This much is obvious, but the costs to consider when renting or buying are significantly different. When deciding to buy a home, you need to account for the down payment and closing costs, as well as your mortgage costs.
Up-front costs
Typically, the down payment you make on a home ranges between 5% and 20%, with closing costs adding another 5% on top. Your mortgage is decided by the length and size of your loan. If you are trying to buy a $250,000 home, you will need to pay between $12,500 and $50,000 on the down payment and potentially another $12,500 on closing costs. This upfront cost is significantly different from renting. To rent, you only need to pay a security deposit, which is typically a month’s rent.
Mortgage
Common advice suggests that when taking on a mortgage, monthly payments should not exceed 28% of your gross monthly income. So, to continue our example above, let’s say that you have the $50,000 to put down, and you have a favorable interest rate. Your loan amount would be $200,000, making your mortgage somewhere around $900 per month. To keep mortgage costs at or below 28%, your gross monthly income should be around $3,200.
Location and Market
One of the main arguments you may hear when you debate the question of renting vs. buying is that buying allows you to build equity. This is true to an extent, though the first payments you will make will consist mostly of interest. The location of your home and the market in which you bought it play a significant role in that.
Life is unpredictable, for the most part. There is a significant gain to be made for buying a home in a good market and a good location, as the home’s value can increase. On the other hand, the opposite is also true. There are a myriad of reasons that could devalue the area and, in effect, your home. Whether it is the right time to buy and whether it is the right place is critical. As the old saying goes, “Location, location, location.”
Personal Considerations
While you may or may not have the money to pay for a mortgage or the up-front costs of a home, the personal situation you find yourself in when deciding to move is just as valid as the financial aspect. The intangible gains of homeownership could outweigh the struggle it may be to afford it off the bat, and that is fair.
How Long Will You Stay in the Home?
One of the best benefits renting provides is the ability to move when you want to. You will have to wait until your lease is up, but that flexibility is an important factor to consider when deciding where to live. When making this decision, you should factor in the length of time you plan to live in a particular place.
For instance, if you are only planning on living in an area for two to three years, it may make more sense to rent. Since you are planning to leave, you will not build much equity in a home during that period. On the other hand, if you are looking to put down roots in an area, the cost of owning a home may, in the long run, cost less than renting.
Over time there will be a difference in the monthly cost of renting, as it is typical for rent to increase between new leases. While owning, however, if you have a fixed-rate mortgage, this monthly cost will remain relatively static over time, with the initial costs of buying being the major cost difference. To see this in action, check out a calculator that illustrates this over a particular set of time.
At the end of the day
When making this decision, the choice is ultimately up to you based on how you want to live your life. If you have the money to do it and you want to own a home, you should. It may save more to own a home in the long run than renting, or cost more, if the property requires significant maintenance. When you find the place to call home, at the end of the day, whether you rent or own is not the most important part. What is most important is how you feel being in it. There is no correct way to live, just as there is no true answer to rent or buy. There are considerations to consider when deciding, but only you can choose what is right at the end of the day.
