There’s a lot of conflicting advice about whether it’s smarter to rent or buy. Some say renting is like throwing money down the drain when you could be building equity in your own home. Others argue there are better ways to invest your cash, and you’re giving up valuable flexibility.
“We typically make big decisions like whether to rent or buy with emotion and defend them with logic, which is why it’s so easy to make a case for either,” explains Dana Bull, a Realtor at Sotheby’s Harborside in Boston.
But there are actually several considerations that can make the decision to rent or buy much easier. Here are five signs you’re ready to be a homeowner.
Enjoy gardening and fixing things up around your place? That’ll make homeownership easier. From coordinating maintenance and repairs to dedicating weekend time to yard work and other projects, owning a home requires a big time investment on top of the financial one. Be sure you’re ready for that responsibility.
“If you’d rather be able to call a landlord to handle issues when they arise, you may be better off renting for now,” says Certified Financial Planner John Piershale of Piershale Financial Group in Crystal Lake, Ill.
After deciding to take the leap, the next step is to save up a 20-percent down payment. This helps you avoid private mortgage insurance, which is typically equal to 1 percent of the purchase price (and paid annually). “If you can save more than 20 percent, even better,” Piershale says. “Taking out a smaller mortgage means you’ll pay less in interest over time.”
If homeownership is a near-term goal, you can take advantage of your flexibility as a renter by finding a roommate or downsizing to a cheaper place to accelerate your savings.
A mortgage is just one home cost to budget for—there’s also taxes, insurance, maintenance and homeowners association fees. Generally, mortgage lenders want to see all these costs add up to no more than 28 percent of your income, Piershale says. (You can get estimates on sites like realestate.com.) It shows you can comfortably afford home costs and other living expenses, as well as repairs that may come up.
Don’t have that much wiggle room? Consider looking at homes with lower price tags or work on upping your income and savings while you’re still renting.
If you’ll only live in a particular area for a year or two, renting is likely your best bet. “Having the option to get up and leave with minimal strings attached is very appealing,” Bull says. Renting can also be a smart way to test the waters, learning what you like and dislike about different neighborhoods.
When you’re ready to put down roots, and plan to stay for at least five years, buying’s back on the table. Just make sure you thoroughly research the area first: If you have kids, are you happy with the school district? Is the neighborhood safe? Are the home prices increasing generally? You can find detailed information on crime rates and school rating on sites like City-Data.
If you can rent in your desired area for much cheaper than a mortgage and other housing costs would set you back, you may benefit from renting a while longer and saving or investing the difference in monthly expenses. Not only can this build your net worth in the meantime, but it allows you to test-run your budget. When you do buy one day, you’ll already know you can comfortably handle the uptick in expenses.