Deciding Whether to Rent or Buy a Home

beagle looking out of home window

My family has recently come to an interesting fork in the road. My youngest is about to head to college, joining his older sibling at a state university about an hour away from our home. My wife and I are tired of the city life and have long considered moving once he finished high school. With home prices and mortgage rates both reaching new highs, and the fact that we may only be in a new house for five years, the question of whether to rent or buy has come up. If you are facing a similar decision, here are some things to keep in mind.

Can you afford to buy a home?

There are many different loan programs available, some with low down payments, others with adjustable-rate mortgages. For the majority of people though, you will receive the best rate if you are able to put 20% down when you purchase a home. For a $400,000 home, you would need a down payment of $80,000.

There are loan fees, costs for inspections, and moving expenses as well. If you’re selling your home, you might need to spend some money for repairs before closing. Additionally, most people spend money upon moving into a new home, whether for paint and flooring or just for furniture that better fits the space.

So the question becomes – can you really afford to buy a home? You could easily spend $100,000 (including the down payment) to buy a $400,000 house. Yet you can’t let that initial chunk of change put you in the poor house, because you will still have mortgage payments every month, along with potentially higher utility bills if the home is substantially larger than your current abode.

Some advisors have suggested new home buyers have six months of living expenses saved up along with the down payment. That may be a tough go for you. At the very least, look ahead several months to see if major bills will come due just as you’re settling into the new house. An insurance payment or tax bill could swamp your best-laid plans.

Are rents cheap in your area?

According to a recent Realtor.com study, the monthly cost of purchasing a starter home is cheaper than renting a similar-sized apartment in the majority of US cities. You might be able to guess where this isn’t so; many coastal cities (Los Angeles, San Francisco, Seattle, and New York City) have such high-priced homes that rentals still may offer a better deal.

You can calculate a price to rent ratio to help you decide if it’s better to rent or buy using this formula:

Median home price/median annual rent = price to rent ratio

If the ratio is 15 or less, you should consider buying. Over 20 and homes may be overpriced relative to rentals, so you should consider renting. Fidelity provides a calculator where you can enter relevant data and get a result about whether it would be better to rent or buy. It takes into account not only the initial costs but what your down payment may grow to at an assumed rate of return if you invest it versus using it to buy a home.

How long will you be in the house?

It can take years for your house to appreciate enough to cover the fixed costs of purchasing a home. And when you sell you have yet another cost – the cost of employing an agent. Most experts recommend if you aren’t committed to staying in your home for at least five years, consider renting. With recent price appreciation, some have lowered their minimum to three years. However, in a rising interest rate environment, housing prices may cool, meaning you would have to stay longer to cover the fixed costs.

Consider too if your company has been hinting about either relocating their office or having you relocate. Even if they offer to assist, it could prove difficult to overcome your initial expenses if you move a year after closing on your new home.

How stable is your job?

The last thing you would want to do is purchase a house if you work in an industry that has been prone to layoffs. That may not seem to be an issue today, when recent news reports have stated there are two jobs for every one unemployed person. Yet these numbers will remain in flux. If you have concerns about your industry or more specifically your job performance, renting may be a better option.

What type of person are you?

Everyone may be telling you that you’re throwing money away by renting. But what type of person are you? Do you cherish the freedom to move at a moment’s notice? Do you dread having to fix a leaky toilet yourself instead of calling your landlord? Just because owning is right for some, it might not be right for you. Make sure you are comfortable with all aspects of home ownership, including repairs and maintenance.

Our decision is still up in the air. If we end up in a lower priced area that’s closer to my kids’ college, I could see us purchasing a home. If we end up in our current metro area, we may rent. We’ve both rented and owned homes in the past so that’s not really a concern. Moving twice if we rent then find a home to purchase? Yeah, that’s more of an issue.

Photo by Ralph Ravi Kayden

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