Buying a house can be the most rewarding purchase you ever make. However depending on your current circumstance this may not be your best option. To help make an educated decision, try to answer the following questions first:
1. Do you really want to own your home?
Some would argue that this is the first question you should ask yourself. Home ownership, like everything else, is a matter of choice. Only you can decide whether or not home ownership is important to you. If it is then you may want to re-assess how you spend your money every month.
2. How often do you expect to move in the future?
If you expect to be moving a lot (every couple of years or more) then you probably shouldn”t buy your own home. Every time you buy or sell a home you incur significant costs (selling commissions alone average 6%). Unless you get lucky and the value of the home you purchased goes up by at least 10%, you”ll be losing money.
3. How stable is your employment situation?
You should only consider buying a home if your employment is stable. Home ownership requires a number of regular payments like the mortgage, property taxes, maintenance, insurance, etc. Missing any of these payments can trigger terrible consequences for a homeowner. Unless your employment is stable, your best option is “renting”.
4. Can you afford to make the monthly payments?
When qualifying for a loan, most mortgage companies will not allow your housing costs to be more that 33% of your gross income. Housing costs include your mortgage payment, property taxes, utilities, and 50% of condo fees if applicable. If your total debt servicing costs (housing costs plus all of your other monthly debt payments) exceed 40% of your gross income you will not qualify for a mortgage.
How much rent are you paying now? What is the maximum amount you are willing to pay?
If you buy a home, it is important to have some money set aside for “emergencies”. You may not be able to save as much money as a homeowner as you did when you were renting, but it is important that you leave some room in your budget. If you have to stretch your budget too far, you should definitely reconsider your home purchase.
5. Do the math
Housing costs can be divided into shelter costs and investment costs. When you rent, you pay your shelter costs, and the landlord pays the investment costs. When you buy, you pay both, which is usually more. Ten years later when you sell the house, you will find that your investment did well and you saved a lot of money by buying.
From a purely financial standpoint, whether you should rent or buy comes down to your monthly budget and the cost of borrowing. If you have the down payment and interest rates are 5% or lower, it makes very little difference whether you rent or buy. At interest rates above 8%, buying will cost you 20% or more than renting.
Although it might seem that you will be spending more money on buying a house than renting, you need to consider your options and priorities. There are many more advantages of purchasing a home over renting.
Buying a house is an investment, and for many people it is a good one. You can purchase insurance to help you manage any potential risks like fire, earthquakes, and thefts. Remember to take your buying/selling costs into account when considering selling your home. The strength of the real estate market in your area will determine the return on your investment.
Assuming that you can afford the increased costs of owning your home, the question of what”s better, renting or buying a house, becomes one of personal preference. There is a certain satisfaction in owning your own home, but only if it is important to you.
If you are only staying somewhere for short period of time (less than five years), renting is almost always better; the transaction costs of buying and selling houses will definitely make it less expensive just to rent.
For longer periods, buying a house is usually better. Although if you have the discipline to invest the difference between your rent and your potential mortgage and other buying costs in a reasonably high yielding investment, renting might be better. But that’s if you carefully figure out the difference and diligently invest that difference. If you can’t do that then buying is probably the better choice.
Buying a house is usually a sound long term investment as it helps you build equity vs. throwing your hard-earned money away as rent real estate generally appreciates; a house bought today is worth more a few years down the road.