For many people, moving time means decision time: Do we buy a home or find a place to rent? This dilemma doesn’t just face young people starting out, but it also stumps established professionals relocating for a job and empty nesters who have sold the big family home.
Corey Fick and his wife, Jessica, both grew up in families that owned their homes – he in Washington state and she in Michigan. After finishing college and graduate school and getting jobs with nonprofits in Boston, the Ficks, both 27, started thinking they’d like a home of their own.
“I’ve always wanted to buy a house,” Corey Fick says. But he also knew that decision required some investigation and preparation. “Wanting to do something and being able to do something is a different thing. … There are a lot of unknowns. I feel like I read all the time about the hidden costs of buying a house.”
Being a personal finance nerd and the publisher of a website called 20s Finances, Corey wasn’t content to decide based on emotion. So he did some analysis and was surprised to discover that, for just a little more than what they were paying to rent a one-bedroom condo, he and his wife could buy a two- or three-bedroom duplex condo in Boston – if they made a substantial down payment.
The Ficks liked the idea that their mortgage payment would be fixed for 30 years, or as long as they stayed in the home, even as prices and, they hope, their salaries rise. Plus, after 30 years, they’d own the place free and clear.
When it comes time to decide whether to buy or rent, a combination of practical and financial factors have to be considered.
Calculators that will help you weigh whether to buy vs. rent are available at The New York Times, Bankrate.com and Trulia, among others. While these calculators ask how long you expect to live in the home, your tax bracket and even allow you to try on different scenarios, none of them take into account all of the personal factors that affect an individual’s decision.
Here are seven questions to ask yourself when determining whether buying or renting is best for you.
How long do you expect to be in the home? The longer you plan to stay, the better off you are buying. That’s because buying and selling cost money – and require a significant amount of time and effort. If you plan to stay less than five years, you might want to rent instead.
Would you be content if circumstances meant you had to stay longer? People who bought a “starter” home in 2005 thinking they could sell and buy a bigger home a few years down the road ended up stuck in homes that were worth less than they owed on their mortgages due to the housing crisis. Home prices are rising now, but there is no guarantee they will continue to rise, and the rate of increase has already slowed.
How stable are your job and your life? If you’re in a declining industry and your job is not secure, you may not want to lock yourself into a mortgage or a city. If you’re involved in a romance with an out-of-town love, or considering relocation for other reasons, you may want to rent. Buying a house and selling it a year later to relocate is likely to cost you some money.
How do the monthly costs compare? Do some realistic math. Make sure you consider all the monthly costs of owning, including property taxes, insurance, homeowner or condo fees, lawn maintenance and other regular costs. Utility costs also may be higher if you buy, since many rents include water service and garage collection.
Do you have savings for a down payment? It’s possible to buy a house with as little as 3.5% down payment with a Federal Housing Administration mortgage. But in a competitive market, you may find sellers choosing offers with higher down payments and fewer contingencies. Plus, a higher down payment means a lower mortgage payment and no private mortgage insurance.
Do you have savings to pay for repairs? All homes, even new homes, sometimes need repairs. Water heaters break, pipes leak and termites periodically drop by to wreak havoc on your home. Condo dwellers aren’t immune because they can face sometimes hefty assessments to pay for repairs to the entire building.
Would you be better off financially if you spent the money elsewhere? If you spend your savings on a down payment for a home, that money is no longer earning money for you. Depending on how it’s invested, you might be better off financially renting and using your discretionary cash for investments. Consider the alternatives and do some math to determine which route is best for you.
A version of this story appeared previously at U.S. News & World Report.
You state in the final paragraph that if a buyer uses their savings on a down payment for a house that the money is no longer earning money for them.
Perhaps it should be pointed out that that money may well be earning lots of money for them in the form of an investment in real estate. Of course, as we all know, there are no guarantees. Of course, there is also the interest tax write-off, principal reduction.
Overall, a nice article nonetheless.