It’s a struggle that most people deal with at some point in time: Should I continue renting an apartment or is it time to buy real estate of my own? Making your foray into homeownership is not a decision to take lightly. There are a number of questions to ask yourself before taking the leap.
First and foremost: Where do you want to live?
You may have noticed that rents across the country have been rising—but so have home values. Even though interest rates are still hovering around near-record lows, the fact that homes have appreciated has made it harder for some buyers to enter their local real estate market. As the old adage goes, real estate is all about location, location, location! That is especially true when it comes time to decide where you want to live.
For the country overall, the median rent is just over $1,400 per month. That’s enough to cover the monthly expenses associated with owning a home that costs about $290,000. The average home value in the U.S. is $196,500, according to real estate website Zillow. So in most markets, buying a home makes more sense nowadays than renting. That’s true in at least 37 of the nation’s top 50 markets, and is most pronounced in cities like Detroit, Cleveland, Milwaukee and Baltimore where rents are nearly twice as expensive as the city’s median home value. However, it’s much more difficult to enter the market in cities like San Francisco, New York and Boston where home sales are hotter than ever. If you want to live in one of these cities, renting is generally considered more affordable at this point in time. When making your decision about whether to rent or buy a home, start by evaluating where you want to live.
…and for how long?
Most people look at how much they’re paying in rent vs. how much it would cost them to afford a mortgage and make their decision about whether to rent or buy based upon that calculation. This approach overlooks the costs of buying and selling a home. In addition to your down payment, homebuyers also need to pay for a home appraisal, inspection, homeowners’ insurance, property taxes, title insurance and other closing costs that easily top $10,000. When it comes time to sell real estate, the sellers are also responsible for paying both real estate brokers’ commissions (usually 5-6% of the purchase price, in total), transfer fees and other closing costs.
For all of these reasons, it does not usually make sense to buy a home if you only plan to live there for a short period of time. The entry and exit costs could outweigh any appreciation you have in the home, resulting in a net loss for you as the owner. There are several “Rent vs. Buy” calculators available online to determine the “breakeven horizon” depending on the area you’re looking to buy, and the specifics of your deal (e.g. how much you plan to put down as a down payment). If you plan to live in the home for longer than your breakeven horizon, then buying is a good idea. If not, consider renting until you’re ready to settle down somewhere more permanently.
How much money do you have saved up?
Buying a home is expensive. In addition to the closing costs we mentioned above, most banks want you to put down 20% as a condition of your mortgage. To put this in perspective, that means coming up with $60,000 to buy a $300,000 home. Some loan programs (e.g., FHA loans) allow you to put down as little as 3.5%, but then you’re on the hook for paying private mortgage insurance (PMI), which can cost hundreds of dollars each month.
Say you have enough money for the down payment and closing costs – are you leaving yourself with any cushion? Even new home sales can have unexpected costs. The general rule of thumb is to have at least six months’ worth of housing payments liquid post-closing in case any unforeseen real estate expenses arise.
What’s your credit score?
The majority of people take out a mortgage to buy a home. The terms of the loan you’ll be able to get relies heavily on your credit score. Yes, interest rates are at record lows – but you can only access that low cost credit if you have an excellent credit history. If you have credit issues, or if you’ve been on your job for less than a year, you may have difficulty obtaining a real estate loan. Instead of jumping into home sales, take a step back, rent, and focus on strengthening your credit score. A better credit score means a lower interest rate, and even a 1-point difference on your interest rate can result in saving tens of thousands of dollars over the lifetime of your loan.
Are you ready to take on the responsibilities of homeownership?
You may have painted a rosy picture of homeownership in your head: you’ll beautifully furnish your home, host dinner parties, and become an active member of your community. It seems wonderful, on the surface. But buying a home isn’t for the faint of heart. Real estate requires ongoing repair and maintenance. If you don’t keep up with it, your home will eventually lose its value and capital improvements will become all the more costly. Are you ready to navigate the weedwacker, glean cutters of debris and change furnace filters? If not, consider renting a while longer.
The Bottom Line
The pressure to buy a home can be immense, particularly in markets where real estate values continue to rise. But in some cases, it actually makes more sense to continue renting instead of buying real estate. The decision ultimately comes down to a person’s individual circumstances. Weigh these questions to help guide you to the decision that best for you.