If you've been renting for a while, you might be wondering, "should I rent or should I buy a house?" After all, you've likely seen or heard ads talking about how low interest rates are now. And they're correct. Although experts predict that interest rates will rebound a little in 2021, most people expect them to remain low by historical standards. Talk of these low interest rates typically gets renters wondering if it makes sense to continue to rent or if they should join the millions of Americans who own their property.
Buying a home is a sincere commitment. Homeownership is not something to take lightly. If the roof leaks, you're on the hook for it. You have to pay property taxes, insurance, and various other fees when you own a property. As a renter, the landlord shields you from most of that. On the downside, though, you don't build any equity.
If you're wondering if you should continue to rent or if maybe you should start looking at buying, here are three things you need to know.
Should I Rent or Buy a House? Start with Your Financials
If you're considering renting vs. buying, the first thing you need to know is your financial situation. That, more than anything, governs whether you should rent or not.
Buying a home frequently makes sense if you can have a monthly payment less than or equal to what it would cost you to rent. Calculating your entire mortgage cost, however, isn't always straightforward. You'd need to know what you qualify for and what assistance options are available.
When looking at your financials, start with your credit score. That will determine, primarily, what type of mortgage you can obtain. If your credit score is 620 or above, you can qualify for most mortgage types. Jumbo mortgages, typically those above $510,400, require a much higher credit score.
If your credit score is below 620, you still have options. For most people, an FHA loan is the best choice. You can get an FHA loan with a credit score of as little as 500, although you'll get the best options if you have 580 or above.
To get a mortgage, you'll also need a debt-to-income ratio of less than 50%, preferably less than 40%. To calculate this, add up all your monthly minimum loan amounts (so your minimum payments on your credit cards, car loans, student loans, 401(k) loans, etc.), and divide by your pre-tax monthly income. Multiply by 100. That's your debt-to-income ratio. As a simple example, let's say your minimum credit card payments are $100, and you have a car loan for $200. You earn $1,000 per month. Your ratio would be $100 + $200 = $300 / $1000 = 0.3 * 100 = 30%.
You'll also need a down payment. FHA loans can have as little as 3.5% under certain circumstances. Conventional loans usually do best at 20% down (or, at least, you'll pay no PMI with >20% down), but you can get away with as little as 5% in some cases. If you have no down payment, there are frequently assistance programs at the state level that can help you. For example, Florida has a few first-time homebuyer programs!
If you meet all these criteria, look at some houses online and start plugging some numbers into an online calculator! If you can find a way, including property taxes, insurance, and HOA fees (if applicable), to make it work, you should seriously consider buying!
There Are Often Hidden Benefits To Homeownership
One of the most obvious reasons people start asking, "should I rent or buy a house" is that they want to start building equity. That's a common reason to want to buy instead of rent.
However, there are other hidden benefits. For starters, you can configure things exactly how you want them! Don't like that wall's color? No problem. Buy a bucket of paint at your local hardware store and change it. Don't like the toilet? Again, no problem. Assuming you can afford it, buy another one and get a plumber to install it. There's something remarkably refreshing about being able to customize your living space exactly how you want it - especially if you have been renting for a very long time.
Additionally, owning a home means that you can take advantage of property value appreciation. While there's no guarantee that properties will go up in the future, even buying something small to start helps you take advantage of appreciation, so you're ahead of the game if you want to trade up later.
For example, let's say you're renting at $1,000 a month. The home you want is $500,000, but that would require a $100,000 down payment to avoid paying PMI. Instead, you buy a $100,000 condo with a $20,000 down payment you have saved. Let's say you put all your money into that and pay it off. Now the home you want is $700,000, an increase of 40%, but your condo has also increased 40%, so it's worth $140,000. That's still your 20% down payment ($140,000 is 20% of $700,000).
By buying something sooner rather than waiting, you've been able to save for the home you want gradually. Through price appreciation, you still have enough to buy your next home.
Should I Rent or Buy a House? Homeownership Provides Stability
Rent prices can increase. People can decide to no longer rent their homes and elect to move into them again. Or, perhaps the owner decides to sell the property, and the new owner doesn't take good care of it.
These situations can happen with renting. You could find a lovely situation that winds up no longer working 5-10 years down the road.
With a mortgage, this won't happen. Assuming you keep paying the monthly payments, you'll be able to live in your home. And, assuming you get a fixed loan, you won't have to worry about your mortgage payments increasing (you may, though, have escrow adjustments).
Especially if you have a family, that stability can be invaluable!
Homeownership Has Advantages
When considering the proverbial question, "should I rent or buy a house," the answer to that is deeply personal. There's no right or wrong answer. However, given the advantages to homeownership, perhaps the right way to look at it is, "do I have a reason not to buy?" Buying has advantages, and if you're fortunate enough to find yourself in a financial situation where you can buy, it usually makes sense to do so. Still on the fence about what to do? Here are a few additional signs it might be time to buy!
If you're looking at buying, check out some homes on SimpleShowing. Buying with us will give you a closing cost credit that can help you pay your loan, pay for some repairs, or give you some added cash!
Whether you should choose renting or buying a house is ultimately a decision rooted in personal circumstances, financial readiness, and market conditions. Considering factors like monthly rent, mortgage payments, closing costs, homeowners' insurance, and more, it's clear that both choices have their unique costs and benefits. Renting may involve less responsibility and upfront costs, as renters insurance is usually cheaper than homeowners' insurance, and there are no closing costs. However, renting does not allow for the potential appreciation in the housing market or offer the tax benefits related to homeownership.
On the other hand, buying a house involves a mortgage loan, and although the initial costs can be high due to closing costs and a down payment on the home's purchase price, there are several long-term financial benefits. These include building equity, the potential for home price appreciation, and the possibility to leverage tax deductions related to mortgage interest, local property taxes, and private mortgage insurance. Moreover, a fixed-rate mortgage payment can provide stability compared to potential fluctuations in rental prices.
Considering these aspects of renting versus buying, your decision should also take into account housing prices in your desired area, expected changes in the housing market, and your readiness for the responsibilities and costs of homeownership. Making a home purchase is a significant commitment and should be made with thorough research and understanding of both the upfront and long-term costs, including the mortgage payment, homeowners' insurance, and property taxes.