If you are renting and thinking about buying a home, let’s look at some questions you must answer first and the advantages of renting and buying…
Should you rent a home or buy a home depends on many different factors. What is right for one person isn’t always best for someone else. But no matter what, you will always need a roof over your head!
I am not going to say that buying a home or that renting is better. This is a very serious question that you must answer for yourself!
Let’s look a little deeper at the question of if you should rent or buy a home!
Rent Or Buy Questions to Ask Yourself
If you’re thinking about buying a home, first you need to ask yourself some serious questions! Your answers will guide you to deciding what is best for YOU!
What Are Your Financial Goals?
Take a look at your financial goals and determine the ones that are most important to you. Buying a home may be your number one goal.
Or maybe you’ll want to work on other goals before taking on the very serious commitment of home ownership. Remember that you must decide what is best for you and your long-term goals!
Do You Have the Money to Buy a Home?
Renting does not require as much cash in the bank as buying a home. When you sign a lease, you only need enough to pay the deposits and the first month’s rent.
To buy a home, you need to have enough to cover the down payment and closing costs. This will vary depending on what type of mortgage you select and what is best for you.
If you don’t have enough money to buy a home now, you must save for a down payment and the closing costs. If you do have the cash to buy now, you may want to think about if this money could help you to achieve other goals instead.
Some mortgages require a down payment of 6% to 20% of the home ’s value. FHA mortgages require a down payment of 3.5% plus closing costs of another 2-3%.
There are other options such as USDA mortgages or getting the seller to assist with your closing costs. Investigate all your options by speaking to the lender of your choice!
If you put down 20% or more down, you can avoid paying private mortgage insurance (PMI). Also, this means you will have more equity in the home from day one.
Comparing Rents and Home Prices
You need to look at your budget and what is a comfortable amount you can afford. One of the first steps of buying a home is getting Pre-Approved.
You must determine your budget by selecting a monthly payment that is very affordable. There is more to consider than just the monthly mortgage payment.
Remember to include taxes, insurance, HOA dues, repairs and maintenance costs too! I suggest you set aside 1-3% of your home’s value every year to cover home maintenance costs.
Now compare local rents to the total monthly housing payment that you would be making if you bought a home. Think long and hard about what is more attractive, affordable and realistic for you.
Can You Get a Good Deal on a Mortgage?
Before you buy a home, you need to make sure your credit is very good! You must have a steady, dependable income and a good credit score to get the best rates and best terms on a mortgage.
While it is possible to get a mortgage with a lower credit score, that may not be your best choice. The time it takes to improve your credit score will pay off in the long run.
By increasing your credit score, you could save thousands over the life of the mortgage!
Why Buying May Be Better for You
If you plan on staying where you are now for several years, you may be better off with buying a home. You need to think about your job and if your career means you must relocate every few years.
Buying a home will not make sense if you know you will be moving soon! Remember that owning a home is a long-term investment!
Owning a home gives you rewards that aren’t accessible to renters. In the past, tax deductions were a huge advantage for homeowners. The recent changes to income taxes mean you must talk to your tax person and financial advisor to discuss these changes.
One thing that has not changed is you are free to change what you want to your home! You can do what you want as long as you follow local zoning and building laws.
If you want to add on to your home, you don’t need to get a landlord’s permission. You will need to make sure to get permits and obey all the local rules and regulations.
If you plan on borrowing money to complete any additions, you may need the approval from your lender. Additions increase your home’s value and will help to increase the equity in your home.
The equity in your home is the value of your property minus how much you still on your home loan. The equity in your home will increase as you pay down the mortgage. Also, if you use a bigger down payment, you will instantly have more equity in your home.
It is possible to get a loan from a bank that is based on the equity you have in your home. Please do not think of your home’s equity as an ATM to use whenever you want!
Your home equity is something you should only tap into when you actually need it. Home equity loans can have superior interest rates because the loan is secured by your home.
Using and abusing the equity in your home can lead to being underwater.
Being underwater means you owe more on the mortgage than it is worth. Home values can decrease in times of extreme economic distress such as the Great Recession.
While decreasing home values are rare, you must be aware it is a possibility! That being said, owning a home has been shown to be a great wealth building investment.
You do not want to be underwater when or if you have to sell your home. This means you might have to bring money to the closing if you still owe on a mortgage!
If the contract price of your house is lower than how much you owe on the mortgage, you will need to do a short sale or bring cash to the closing. A short sale is when you get the bank holding your mortgage to agree to take less than they are owed.
Another great advantage of buying a home is you will enjoy having more privacy. Your property manager or landlord won’t be bugging you about anything!
Also, you will not have to pay extra fees or deposits for pets when you own a home. There will not be any restrictions about your pets other than the local laws and regulations!
Why Renting May Be Better for You
If you’re going live somewhere for less than two years, you may not get back all your money back when you sell. Buying a home means you will need to pay for the home inspection, appraisal, title recording fee, mortgage fees and closing costs, etc.
Normally, you must own a home longer than two years to make a profit when selling a home. Selling a property means there are costs you must pay like the commissions and getting the home ready to sell!
One of the biggest reasons that renting beats buying for many people is paying for repairs. When you own, you can’t call the landlord when something breaks!
When you rent, repairs are included with your monthly rent. As long as you aren’t breaking stuff, the landlord will be the one responsible and paying for the repairs.
When you own a home, it is your responsibility to make repairs and maintain the home. This is why you need to save every month for unexpected repairs and normal maintenance.
When you rent, you are not tied down like you are when you buy a home. You can sell a home but this takes time and money.
When you rent, you can move when your lease is up or according to the terms of your lease. There is much more flexibility to renting if you must move in a hurry.
Renting can be better if you are too busy to keep up with the landscaping. When you rent an apartment, taking care of the landscaping is the responsibility of the landlord.
When you rent, you may or may not be responsible for the yard and other outdoor stuff. You must carefully read the lease BEFORE signing to understand your responsibilities!
One disadvantage with renting is you need the landlord’s permission to make ANY changes. If you want to do something simple like paint, you may not be able to!
Another disadvantage of renting is you do not benefit from increases in the property’s value. Any increases in the property’s value is going into the pocket of the property owner.
All the rent you pay is money you will never see again! Every month that you pay rent helps the property owner increase their wealth.
The Take Away
Like I said, the decision to buy or rent a home depends on many different factors. You must think long and hard about what is best for you.