Choosing to either rent or buy a home remains the biggest financial decision most people make. Pros and cons exist on both sides, and ultimately the final choice comes down to your own life situation and current personal economic outlook. One thing worth noting is mortgage lenders remain more discerning in the wake of the Great Recession.
In short, if you ultimately decide to purchase a house, expect a 20 percent down payment as a minimum requirement, as well as having a stable employment situation and a great credit history. Let’s take a look at the pros and cons of both choices along with the steps you need to take to make the right decision.
The Pros and Cons of Renting a House, Condo, or Apartment
Here are a few pros and cons of renting to consider.
- PRO — Renting gives you additional life flexibility and makes it easier to relocate if desired.
- PRO — Renting makes sense when you are first entering the workforce after graduation.
- PRO — Renting doesn’t require a large down payment on a mortgage.
- CON — Your rent payments don’t build equity over time.
- CON — In most cases, you are limited in making modifications to your residence’s interior and landscaping.
- CON — You are at the mercy of a landlord should they sell the property you are renting.
The Pros and Cons of Buying a Home
Purchasing your residence also comes with its own share of pros and cons.
- PRO — Your mortgage payment gradually builds equity over the life of the loan.
- PRO — No limitations on landscaping or interior changes to your residence, unless you buy a condo with a draconian owners association.
- PRO — Significant tax benefits on mortgage interest and home improvement expenditures.
- CON — It is difficult to save enough money for a mortgage down payment.
- CON — You are responsible for all fixes and new appliances at your residence.
- CON — If you want to move to another region, selling your house can be a hassle.
Making the Correct Decision to Rent or Buy
There are many things to consider when deciding to rent or buy your residence. As with most complex decisions, following a step by step process helps to make things go easier. Make it a point to document everything in a spreadsheet or word processor so you can refer to it before the final choice gets made.
Do you have enough Money for Mortgage Down Payment?
If you don’t have enough money for a 20 percent down payment on a mortgage your chances of being approved for a home loan suffer. Making a withdrawal from an IRA or 401K may be an option to raise the funds, but it also may cause a mortgage analyst to downgrade your loan application. If you qualify for a FHA loan as a first-time home buyer, this offers a greater chance for approval, but remember things remain stricter after the financial collapse of 2008.
Ultimately, renting your residence while saving enough cash for that 20 percent down payment gives you the best shot at buying the home of your dreams in the future.
Are your Employment, Credit, and Financial Situations Stable?
Making an honest assessment of your career as well as your current and future financial situation plays a big role in deciding to rent or buy. If you are in a dead-end career or if another metro area offers a better outlook for your profession, tying yourself to a mortgage and house in your current city doesn’t make sense. A poor credit report also makes it difficult to get a mortgage loan.
For some, renting makes more sense until their career and financial situations stabilize. Additionally, consider how long you want to live in your current area, because if you don’t plan on staying for more than a few years, it is hard to get a return on closing costs when paying more on interest at the beginning of a home loan.
How much House can you Afford?
If deciding to purchase a house after coming up with a down payment, you need to figure out how much house you can afford. In the past, banks tended to approve a loan amount greater than what most buyers were looking for, but they are more careful in the current economic environment. Don’t forget to give yourself some leeway when determining a comfortable monthly home payment, while considering property taxes and mortgage insurance, if required.
This convenient “rent vs. buy” calculator at the New York Times website helps give you a feel for how much house you can afford, while also factoring in other criteria, like the historical rise in home prices, maintenance costs, taxes, insurance, and more. Once you’ve reached the final step in your decision tree, this calculator can help you make your choice.
The decision to rent or buy a home or condominium, while complex, offers valuable insight into your life and finances. It remains a useful exercise whether you are just beginning career or looking for a change in its midstream.