The decision to rent or buy a home is a very personal one that only you can make. There is no formula, social media influencer, spreadsheet, app or article – including this one – that can make that choice for you. Deciding whether to rent or buy will require you to take stock of your current situation and make some important decisions about your short and long-term plans.
Where are you financially?
Not everyone is financially ready to buy. In addition to a down payment, home ownership comes with other expenses, such as insurance, utilities, maintenance and repairs. Many ex-renters are surprised at how much more these expenses are in their own home than they were in their rental.
It’s important to get an accurate picture of your entire financial situation. If you are already drowning in debt and barely making ends meet, this may not be the best time to take on the additional challenges that come with home ownership. There are several financial “rules of thumb” out there for helping someone decide if they are ready to buy a home. Here are a few:
- Ramsey Solutions advice will tell you to only buy a home when you are debt free, have a fully stocked emergency fund, can make at least a 20% down payment and will have a mortgage payment, on a 15-year mortgage, that is no more than 25% of your monthly take home pay.
- Another popular guide is that your mortgage payment should be no more than 28% of your gross (pre-tax) monthly income. Often this goes hand-in-hand with recommending that your total monthly debt payments shouldn’t exceed 36% of your gross monthly income. Sometimes you will hear that called the 28/36 Rule.
- Some people use their lender as their guide, and just go with the maximum amount the lender will provide a mortgage for.
Whatever approach you used, be sure to do an honest, deep-dive analysis of your finances. Understand every facet of when, where and why your money comes in and goes out. Be sure to write out a budget and include all of those monthly bills you pay that may not actually qualify as debt. For example, your monthly payments for your gym, pie of the month club, date nights, etc. If passing any of the rules of thumb requires you to cut back on some spending, consider whether whether that is something you are willing, and want, to do.
Where are you personally?
Money isn’t the only factor to consider when deciding whether or not to go down the path to home ownership. It’s important, but hardly the only consideration. Here are couple of areas to think about, too:
- Lifestyle. Is your lifestyle more on the unstructured side with a lot of short-notice trips or time away? Remember that lawns don’t mow themselves – owning your own home requires a little more time and attention to the property than renting. Of course, there are services that can take care of most every chore you need. But, those do have a cost attached, so don’t forget to include those in your financial analysis. There are ownership options, such as condominiums, that don’t require much time or effort to maintain.
- Responsibility. Are you a do-it-yourself, grab-a-tool-and-fix-it type of person? That’s great if you are, but you certainly don’t need to be. You do need to be able to recognize problems and arrange for them to be fixed, though. And, you need to be willing to learn about some preventative maintenance tasks to keep your home in top shape through the years – replacing furnace filters, draining sprinkler systems, etc. Need a reminder on these? Drop me a note here and I can send you a seasonal reminder email to help keep you on track.
Benefits and drawbacks of home ownership
Like most everything in life, there are benefits to owning vs renting. And vice versa.
Some of of the pros of owning (and likewise, cons of renting) are:
- Equity. When you pay your monthly mortgage payment, you are chipping away at your principal balance and will eventually own your home. The same can’t be said for a rent payment. Many people say that every rent payment you make pays someone else’s mortgage.
- Appreciation. Usually, but certainly not always, homes increase in value over time. This means that the home you buy today for $100,000 may sell for $150,000 or more when you decide to sell.
- Tax Advantages. There are costs associated with owning a home that are tax deductible, such as property taxes and mortgage interest. These benefits may fluctuate with the tax code, of course, so some years may be more beneficial than others. By the way, I’m not a tax guy, so be sure to check with a real tax professional before making any decisions based on tax benefits!
- Avoid Rent Increases. Rents often go up with every lease renewal. Having a fixed rate mortgage locks in your monthly payment for the entire term of the mortgage.
- Renovations. When you own your own home, you can renovate as you see fit. This isn’t possible when you rent. Or, if your landlord allows it, you’ll need to leave all your hard work behind for someone else to enjoy when you move.
On the other hand, there are some cons to owning a home (and benefits to renting):
- Moving. Moving is much more difficult when you own your home – mortgage, utilities, insurance, etc. Do you enjoy moving to a new city every year or so? Or, do you live a more nomadic lifestyle, spending a few months here, a few months there? Renting doesn’t lock you into one location.
- Maintenance and Repairs. When something breaks in your own house, you need to get if fixed. No calling the landlord at 2a when the basement floods. No calling maintenance when the light switch fails. All the repairs and maintenance are on your time. And dime!
- Expenses. Expenses will be higher when you own a home. You will be paying all of your utilities, where often a landlord gave you “free” water or electric; homeowner’s insurance is more expensive than renter’s insurance; you may have to start paying homeowner’s association (HOA) dues; maintenance and repairs cost money, even if you do it yourself; etc.
Whether you should rent or buy a home is a very personal decision, and one that only you can make. Both renting and buying come with pros and cons. Hopefully, this short article gave you some good points to consider in making your decision. Here’s another page on my site that includes some tips on buying a home that you may want to read.
Thanks for reading. Remember, I don’t know you or your specific situation. Nothing in this article should be taken as advice specific to your situation. If you have any questions, though, please get in touch – you can find my contact form here. Also, feel free to sign up here for my monthly “Neighborhood News” newsletter for real estate information on your local area.