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Mortgages & Loans 101

Should You Buy or Rent?

By Jeff

Part of the American Dream has almost always involved settling with your family in a quaint home with a white picket fence. And though each person has a different version of that dream, buying a home is still at the heart of the equation. One problem lies in determining when one is ready to buy a home. And, for some people, renting a home or apartment is the preferred way to live. Home ownership is not a one-size-fits-all proposition. Assessing your financial situation and your lifestyle is the first step you should take before deciding whether to rent or buy your residence.

Assessing your timeline

Unless you are planning on staying in a home for a minimum of three years, it probably isn’t a good idea to buy. Buying a home brings with it myriad expenses. To get your money back on your investment, a property needs to appreciate approximately 15 percent. That won’t happen if you move sooner than three years.

Assessing your finances is the first step

You may have the best reasons in the world for buying a home. Maybe your family has outgrown your apartment and you need the space a home offers. Maybe you are tired of paying money every month for rent that is improving your landlord’s financial future. Whatever the reasons, some people are just not financially ready to consider home ownership. Here are some keys to assessing your financial situation:

• Are you ready to make a long-term financial commitment? Buying a home is something that will tie you into a mortgage and other related expenses for a long time. When buying a home, it is a good idea to plan on staying in it until you build up enough equity to consider moving. When you rent a home or apartment, you can usually get out of your lease early or consider a move after your 12-month commitment is up.
• Determine how much you can afford to pay for your monthly mortgage. When you rent, it is much easier to determine how much money you will need every month on which to live. Rent, utilities, and other regular living expenses are pretty easy to figure. When you buy a home, there are other variables that you have to consider like mortgage insurance, property taxes and maintenance costs, just to name a few. Be sure to determine how much money you can afford to take out of your income to live on without stretching yourself too thin.
• Just because you qualify for a $250,000 home, it doesn’t mean you have to buy one. Many potential homeowners get caught up in hearing about how much home they qualify for. When a lender tells you that you can afford to buy a $250,000 home, they often don’t consider all of your financial commitments. You know that you have two credit cards that are maxed out, two car payments that are causing you challenges every month and all of the other monthly financial commitments you have. Be sure to consider all of your monthly expenses to determine just how much of a monthly mortgage payment you can comfortably afford.
• If you buy, are you willing to cut back on your spending? When many people make the decision to buy a home, they fall into a financial trap because they don’t change their spending habits. If you are renting an apartment for $750 a month, and then get a mortgage payment that is $1,200, spending habits have to change. It doesn’t take a mathematician to figure out that you will be spending an extra $450 a month on your mortgage payment versus the apartment rent. Where will you cut back? On eating out? On entertainment? Buying a home often leads to tough budgeting commitments.

Pay attention to the economy and housing market

Before you consider buying a home, it is a good idea to look at the projection for the housing market and the economy. If the housing market is slow, it can be a good time to buy a home because you can probably purchase it cheaper. If, however, you are thinking of moving within three to five years, it might mean that a slow housing market will make your home more difficult to sell.

Weigh your options

Before making a decision on buying a home versus renting a home, be sure to weigh your options. Determine how much it costs you to live every month now, versus how much it will potentially cost in the future with a mortgage. Only you can accurately answer the question: “Should I buy or rent my home?”

6/11/2008

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