Deciding to purchase a house is a major decision for most people, both in terms of the economics involved and the many other ways of owning real estate can change your life. The financial commitment of owning a home, whether a house or a unit inside a building, is significant and should not be approached lightly.
By understanding the financial differences in renting versus buying and determining the right time to make a move, you can make an informed decision about homeownership that aligns with your best interests. Homeownership should be a point of pride, not a cause of worry or stress. Make sure you have all the information you need before making this life-changing decision.
Renting vs. buying
Traditionally, homeowners see their house purchase as an investment and as a way to reduce long-term living costs. It’s important to recognize that while ownership is often a good investment and the overall costs are frequently lower than renting, the financial math can change on the individual level based on various factors.
In some densely populated areas of the country, for example, it’s less expensive to rent than it is to own, even in a long-term view. The extremely high costs of real estate in certain regions mean it’s cheaper for individuals and families at the local median income level to rent, according to an analysis by the Urban Institute shared by USA Today.
Outside of metro areas, it’s generally less expensive to own than rent. However, you may find the additional responsibilities of property ownership too difficult to maintain in certain situations. For example, if your career forces you to move frequently, regularly buying and selling property can be a major drain of time and effort compared to renting. Similarly, if you’re considering a long-distance move in the near future, you will likely want to wait to purchase any property.
The comparable costs of renting versus a mortgage
Rent is generally easier to manage and understand than homeownership. The negatives are a lack of security; outside of rent-controlled units, you often have little-to-no control over the price your landlord charges. You don’t build equity in a rental property, so you never reach a point where it’s paid off and you only have to contend with the costs of upkeep, maintenance and property taxes.
Owning property, on the other hand, involves higher costs up front, although some of them may diminish over time. Buying a home is the most expensive single transaction many people will ever be involved in, CNN stated. High costs mean many homeowners have a mortgage that lasts for 20 or 30 years. However, as a mortgage is paid off, equity in the home increases. Once the mortgage is finished, you pay less to live in the space and can leverage your ownership for other financial needs or simply enjoy the security you’ve gained.
Should I become a homeowner in the near future?
It’s important to have a thorough understanding of your income, savings and your financial habits as you weigh the benefits, costs and responsibilities of homeownership.
Evaluating your income
Whether you rent or own, you need enough money to comfortably afford your living space each month. In general, you can dedicate about a third of your monthly income to housing expenses. If you’re leaning toward home ownership, make sure the combined costs of property taxes, mortgage and property maintenance are all included in your final figure, as are any tax breaks and other assistance.
The down payment
Some lenders offer a zero money down home loan, but usually, a down payment can range from a few percentage points of the home’s total value to 20 percent or more, depending on the circumstances. A down payment that leaves you with no financial safety net is one you can’t afford. That’s money you’ll need to finalize the purchase of a home. To have a better idea of what you can afford, it’s important to talk to a local loan officer early in the home buying process.
Maintaining financial best practices
You likely already know how important it is to have an emergency fund with enough money to cover a few months’ worth of expenses. This money should only be touched when it’s absolutely necessary, and even a major decision like buying a home doesn’t quite measure up. Consider a smaller down payment, longer mortgage term and other options if you’re tempted to tap into your emergency fund.
If you’re not immediately pursuing a home purchase, start setting some money aside now from each paycheck to cover the down payment, closing costs and other financial responsibilities. If you already have a budget in place, it’s simple to add one more expense and review accordingly. If you haven’t, start planning and create a budget that allows you to save for an eventual home purchase.
Ready to start looking at homes? Find a mortgage loan officer near you.