Rent, don't buy, if you answer yes to all these questions
Aug 05, 2019 · 8:06 AMAllison Landa
This audio was generated using Microsoft’s artificial intelligence.
Considering your next household move? You may be wondering whether it makes more sense to buy or rent. The answer depends on your personal situation, thought the answer for most is to rent, not buy. Here is what you need to know before making the decision.
Do I plan to move in the near term?
The first factor to nail down is the larger picture: What is most important to you and your family? If you seek stability and long-term residence in a place to call your own, buying may be more up your alley. However, if you want the flexibility to pick up and move after a little while – or on short notice – you may opt to rent.
One major element here is the amount of time you’d like to stay in your home. The common wisdom is if you plan to move within five years or less, it makes better financial sense to rent. Any less than that and you aren’t as likely to recoup the startup costs associated with buying a home.
According to data from Moody’s Analytics and First AmericanFinancial Corp., the median homeownership stay rose to about 8.5 years in 2016 – up five years from 2008 – so it appears that many people are choosing to remain in their homes longer.
Do I want short-term financial gain?
If you’re seeking short-term financial advantage, renting is the way to go. But if you’re in it for the long term, buying lets you build equity, gain wealth, and perhaps eventually move up to a more expensive property. What you need to identify is the break-even point: At what juncture does buying become more fiscally attractive than renting?
For that calculation, ask yourself the following:
- How pricey is my market? More expensive coastal markets plus big cities like Los Angeles and New York tend to have longer break-even points than other markets such as Atlanta and Orlando in the Southeast. According to Zillow, Los Angeles has the longest break-even horizon: 3.7 years. The shortest is in Memphis: 1.32 years, followed by Birmingham, Tampa, and Orlando.
- What are my plans for a down payment? Most calculations assume a 20 percent down payment. If you plan to put down more or less than that, your mileage will vary.
- How good am I at saving money? As a homeowner, you are somewhat forced to squirrel away cash for a down payment, taxes, and maintenance. As a renter – lacking that savings vehicle – your break-even point may come far sooner, depending on your personal spending and saving habits.
Do I want to avoid maintaining a home?
While this is a big question, keep in mind that housing is a huge decision. You need to nail down your goals – both short- and long-term – before deciding what path is right for you. These include not only financial goals, but also career aims and personal preferences.
If you are a renter considering a home purchase, here are a few questions to help you hone your decision:
- How willing are you to be responsible for home maintenance and repairs? Experts advise homeowners set aside between 1 and 3 percent of your home’s purchase price for yearly maintenance. According to 2018 research from Bankrate, homeowners average $2,000 in yearly maintenance costs. The site also provides a free calculator that gives you an idea of how much you'll spend in taxes as a homeowner.
- Have you or will you save enough money to place a down payment on a home, along with making the monthly mortgage payments?According to the National Association of Realtors, more than 85 percent of homebuyers use mortgage financing for a home purchase.
- Do you plan to keep your current job? Is your work stable?
- What’s your credit picture?
Ultimately, the decision to rent versus buying is tied to your individual situation. It’s important to evaluate not only where you are today, but where you plan to be in the long term. Only then can you determine what choice is best for you.
Allison Landa is an independent creator and not a representative of Bing or Microsoft.