Housing help: Rent or buy?
Friday, 6 September 2019
Owning a home has been a part of the "American Dream" for many years.
Not only did it traditionally mark a financial milestone for many families, it was considered a sound economic decision, as housing prices have consistently increased at a slow-but-steady pace over the last century.
But the housing market collapse in 2008 changed the residential housing landscape tremendously. People stopped considering home ownership as a "sure thing" financially, and the percentage of Americans renting increased dramatically.
Today, the housing market has rebounded in most parts of the country. But the demand for rental properties continues to grow, pushing up rental prices and actually making buying cheaper than renting in many areas.
That being said, how do you decide which option is best for you? Start by considering the following factors:
1. Your time frame
How long do you plan to stay in your home? Does your job require you to move frequently? Do you anticipate a major life change — such as marriage or starting a family — that might require a move?
This is important because there are many up-front costs when purchasing a home. Let's use a $200,000 home as an example. Ideally, you would have $40,000 cash for a down payment, and then closing costs could be an additional 5 percent of the purchase price, or $10,000.
2. Your finances
You need a substantial amount of cash simply to get into a house.
And while there are mortgage options requiring less cash at purchase, the more you borrow, the higher your monthly payment will be, and your long-term costs will increase as well. So if you don't have the funds you need to purchase, renting until you can save more might be a good idea.
Renting, on the other hand, doesn't typically require a large sum of cash up-front. Most often, a security deposit and possibly one or two months of rent are required.
Being able to afford your monthly house or rental payment is obviously important. A common rule of thumb is housing costs shouldn't exceed 26 percent of your gross monthly income.
When you buy a home, your monthly payment will depend on the purchase price, down payment, and your interest rate. Rates are very low now, and there are many types of mortgages available to help buyers to get a manageable monthly payment.
When you rent, your monthly payment is set for the duration of your lease agreement. However, your landlord can increase your rent when it comes time to renew your lease.
Keep in mind there are many additional expenses associated with home ownership, such as repairs and maintenance. There are also utilities, property taxes, pest control, insurance, yard care, and more. It's important to consider all the costs associated with owning a home before you buy.
When you rent, your monthly payment typically covers some of your utilities as well as repairs and maintenance.
And while that sounds more affordable, don't assume renting is cheaper than buying. In fact, according to realtytrac.com, because of limited rental inventory and high demand, buying is more affordable than renting in 66 percent of U.S. housing markets.
Before you decide, it makes sense to familiarize yourself with the rental and residential sales market in your area, crunch the numbers, and see which is the best financial option for you.
3. Your goals and priorities
Historically, home values have gone up over the years. But at the same time, many financial experts warn against considering your home your primary investment.
If your goal is to have a home — something you can call your own and consider an asset — you probably want to buy. Some people dislike the idea of spending money each month without building equity. These people obviously will gravitate towards home ownership.
Then, of course, you must consider your lifestyle. Do you want the security of owning a home, or the flexibility of renting? Do you want to mow the lawn on the weekends, or would you rather be traveling? Obviously finances will play a large role in determining whether you rent or buy.
But if all things are equal financially, whether you rent or buy is a matter of personal preference.
The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial consultant about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.
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