When searching for a place to call home, is it better to rent or buy? The answer to that question depends on a variety of factors, both personal and economic. Homeownership is not for everyone, and in fact, many people find renting to be a better fit. To determine what’s best for you, there are a few pertinent aspects to take into consideration.
As you hone in on particular areas of town, determine whether properties are trending toward appreciation or depreciation. Are there any upcoming events that may cause a reverse effect? For instance, the addition of a nuclear power plant would negatively impact property values, whereas the relocation of a corporation and thousands of employees would have an opposite effect. Staying current with community news and current real estate values can be immensely helpful in your decision to buy or rent. If your findings reveal a downward trend in housing price-points, and you see potential for even greater deflation, renting may be your best bet. However, if your neighborhood research reveals the opposite, and you have adequate financing in place, now might be a great time to consider buying a home in that area.
Cost of Living
Take into account your total cost of living, including housing, food, transportation and personal expenses. Most experts suggest allocating no more than 30-36 percent of your monthly income toward housing expenses. If a mortgage payment would be double a month’s rent, renting might be a better option. Also, consider consulting a tax professional or CPA for a more in depth look at how buying a home could affect your annual taxes.
Maintenance is another topic for consideration. For rentals, upkeep costs are absorbed by the property owner. For example, repairing a costly plumbing issue is not a tenant’s responsibility. In contrast, homeowners are personally responsible for all day-to-day maintenance costs. In the case of older properties, those fees can add up to a sizable annual sum. If your budget doesn’t leave room for repair costs, you might be better off renting. If you do decide to become a homeowner, protect your financial well-being by making sure that your budget includes a discretionary amount to fund maintenance and cover unplanned repairs.
Think about your current lifestyle, are you ready for the responsibility? Do you need the room, travel frequently, enjoy decorating, painting, and yardwork? What would be better a condo or house?
Job Security & Potential for Relocation
Your employment situation should factor heavily into any decision about living arrangements. Has there been a history of layoffs in your current company? Is there talk of relocating the corporate office or your position specifically? If the answer is yes, renting should be the obvious choice. With a rental, there’s always the chance the landlord will let you terminate a lease early. It’s also possible to find someone to sublet the space from you. If you believe you will be staying in the area for some time, it might be smart to build equity in property by purchasing a home, rather than to continue paying rent for an extended period of time.
Credit Score & Debt Ratio
Your credit score and debt ratio are two factors impacting a decision to buy or rent. Research your FICO score, which is used by lenders to assess overall credit risk. A good FICO score is above 650, and indicates a positive credit history. If your score is below 620, lenders will view you as a high-risk candidate, and will extend loans only at higher interest rates. In this case, renting is likely your best option. If you are determined to buy, work on improving your credit before applying for a loan.
Similar to bad credit, high debt ratios can be a deterrent to buying. Lenders consider two factors: a front-end ratio and a back-end ratio. The front-end ratio is the total cost of your mortgage payment, taxes and insurance, divided by your monthly salary; the back-end adds your monthly debt payments to your PITI (combined mortgage, tax and insurance payment) divided by your total salary. Anything above 50 percent is considered a high debt ratio, making qualifying for a loan much more difficult. To improve your debt ratio, pay off loans with low balances to eliminate that monthly payment from your budget. Once you have a good credit score and a low debt ratio, buying will be a more realistic option.
Before you begin looking at homes, find a reputable, professional lender who can explain financing options available to you, and get you pre-approved for a maximum loan amount. That way, you’ll be able to shop for a home with confidence.