Understanding the home buying process before you start shopping for a home can make it easier.
When it comes to renting or buying a home, there’s no clear right or wrong answer. Each option has its tradeoffs, and it all depends on which tradeoffs you’re comfortable with.
Here are the pros and cons of renting a home:
|Pros of renting||Cons of renting|
And here are the good and bad to buying instead of renting:
|Pros of buying||Cons of buying|
The bottom line: Buying could be better than renting if you are ready to take on more responsibility and plan to stay in the home for a while.
The question isn’t just whether you can afford to buy any home — it’s whether you can afford to buy a home you truly want.
Think about neighborhoods you’re interested in, how many bedrooms and bathrooms you’ll need, and other aspects you value in a home. Then look on websites like Zillow or Trulia, or speak with real estate agents about how much these types of homes are selling for.
Once you know how much you can expect to spend on a home, think about two factors: Can you afford the monthly payments, and can you afford the upfront costs?
As a rule of thumb, you’ll ideally spend 28% or less of your gross monthly income on your housing expenses. This includes your mortgage, interest, property taxes, homeowners insurance, and any HOA dues. (Utility bills do not count toward this percentage, though.)
Let’s say your gross monthly income is $4,000. Multiply $4,000 by 0.28, and your total is $1,120. If you abide by the 28% rule, you can afford to spend up to $1,120 per month on your home.
There are some large upfront costs when buying a home, too. You’ll probably need to make a down payment, and you’ll pay closing costs. According to mortgage technology company ClosingCorp, the average closing costs in 2019 were $5,749 including taxes, or $3,339 without taxes.
Do you have the down payment, money toward closing costs, and borrowing capacity for the type of home you want? If so, buying could be the right move. If not, you may need to rent for a while longer.
Don’t forget to factor any tax breaks into your considerations about money. You may qualify for several types of tax benefits when you buy a home, which will set off the costs by at least a little bit.
The credit score and debt-to-income ratio you need to buy a home depends on which type of mortgage you get. If either number isn’t very good, a lender may deny your application for a mortgage — or you could be approved but end up paying a high interest rate, which could cost you tens of thousands dollars over the life of your mortgage.
If your finances could use some major improvements, buying could be more expensive than renting, or even just flat-out improbable.
But if you have a great credit score and low DTI ratio, you may be ready to buy and get a super low interest rate.
Generally, the longer you live in a home, the more lucrative buying can be.
Closing costs are expensive. You may not want to pay thousands of dollars at closing if you’re just going to move in two years and have to pay thousands toward closing costs on another home all over again.
Money is a huge factor in deciding whether to buy or rent, but it’s not the only thing to consider. You should also think about whether you’re ready to take on more responsibility.
When you rent, you can call your landlord when the air conditioner breaks or you suspect the house has termites. But when you own the home, it’s on you to take care of these things, which affects both your finances and your time.
You’re also in charge of covering crucial expenses such as trash pickup, property taxes, and lawn care, among other things.
These are all expenses to factor into your budget, but you should also think about whether you’re okay with spending time and energy on home repairs. If it seems like too much dedication right now, you may want to keep renting.
A home is unique in that you build more wealth the longer you own it — unlike a car, which loses value pretty quickly.
As you pay down your mortgage principal, you own more and more of your home — until you make your last mortgage payment and own the home completely. Owning a home can be a great way to build wealth.
Of course, everyone wants to become wealthier. But depending on your situation, there may be better ways to build wealth right now. For example, you might decide that you want to prioritize saving more for retirement first and continue to rent.
Buying a home can be a great financial move if you’re ready. But you shouldn’t see renting as a financial failure. After taking stock of your finances and goals, you may decide it’s the better decision.
This article was written by Laura Grace Tarpley from Business Insider and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to firstname.lastname@example.org.