You may have heard that buying a home is better than renting. After all, why “throw money away” on rent when you could be building wealth through homeownership? Financial professionals say the decision isn’t that simple.
The answer depends on your personal and financial situation. Before you begin house hunting, ask yourself two key questions: Can you afford to buy? And should you buy?
Can you afford to buy? While being ready to purchase a home means having enough money for a down payment and a monthly mortgage, other financial obligations are involved.
It’s important that your debt levels are manageable before you buy. Without a mortgage, it’s ideal for your monthly debt payments to be less than 20% of your gross monthly income. With a mortgage, debt payments should stay lower than 35%.
You’ll also need to cover homeowner’s insurance premiums with a deductible, pay annual property taxes, hold emergency savings for the costs of major repairs such as roof or driveway replacement and build flexibility into your budget for routine expenses like HVAC tune-ups and lawn care. Don’t forget the upfront costs, such as closing costs, that come with homebuying. They typically run between 2% and 6% of the purchase price.
Should you buy? One of the biggest factors in deciding whether to buy or rent relates to time. The longer you plan to stay in your house, the more likely it is that buying makes financial sense. Generally, professionals say it doesn’t make sense to buy unless you’re planning to stay in the home at least three to five years.
When you buy a home, you face high purchasing costs right away. Initially, you build equity slowly, since most of your mortgage payment goes to interest. Staying in your house longer offers more time to build equity. Overall, the total cost of buying could be lower than renting.
Many factors can impact whether it will be more cost effective to rent than buy. Job stability, potential reduction in income for one or both spouses, mortgage rates, rental costs, the rate at which homes are appreciating in value and the cost of homeowners insurance all come into play. Fortunately, many online calculators account for these factors and help you compare your options.
Beyond the numbers. When deciding whether to buy a house, don’t just look at the cost. Buying a home is more than an investment. Your home is where you live your life. So, you should consider your lifestyle and preferences. Buying might be more suitable if you need stability, want to personalize your home and are comfortable with tying a portion of your wealth to a house. Renting offers more flexibility and fewer maintenance responsibilities.
Ultimately, choosing to rent or buy comes down to understanding your finances, your plans and what you want from the place you call home. Take the time to assess costs and lifestyle trade-offs to help make a choice that supports your longterm goals.
— This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. Edward Jones, Member SIPC
