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Renting vs. Owning a Home: Six Things to Consider

Buying a home isn’t something anyone should take lightly. However, it is the American dream.

Few people go through life with no aspirations to become homeowners one day in the future. But for some, could renting a more solid financial option? When it comes to renting vs. owning, which is for you?

In order to decide whether or not you’d truly benefit from buying a home instead of renting a home, you need to take a few things into consideration and be open and honest with yourself about your ability to sustain home ownership. There are many benefits to becoming a homeowner, but there are also benefits in regards to renting. In most cases, it’s a much more sound decision to own a home: but there are cases when renting might be the best option for your current position in life. So, what things should you consider before you take the home buying plunge?

1. Cost

Cost is perhaps the most obvious concern when you’re deciding on renting vs. owning versus just renting one. Determining a budget that includes all of your financial obligations is the first and most important step in your journey.

Depending on the amount of financial obligations you’ve got on your plate (student loan payments, credit cards, car payments, utilities, etc.), you’ll want to spend somewhere between 15% and 35% of your total income on rent or a mortgage payment. For a person making $50,000 per year (pre-tax), this means you’ll want to spend somewhere between $625 and $1460 per month on rent or mortgage payments. In most cases, you’ll want to stick closer to the lower number instead of the higher one (unless you’ve got very few financial obligations otherwise).

You’ll also want to make sure you’ve got enough money for a down payment on a home if you choose to buy. This will range anywhere from 3.5% of the cost of the home to 20% or more. You’ll also need to account for fees that might be due at the time of signing.

It’s extremely important to remember that mortgage payment estimates– the ones you’ll often see on real estate sites– do not include things like homeowner’s insurance, property taxes and mortgage insurance premiums, which will increase the total amount you pay every month. Once you factor in those items, the monthly payment will increase up to twice as much. (For example, a $100,000 30-year fixed home loan at a 4% interest rate would be around $485 per month– but once taxes and insurances are figured into that, it could be as much as double that every month).

Decide how much you can truly afford to spend on your housing payment and decide what kind of house you could buy in your desired location with that payment. This will help to initially guide you in your decision.

2. Location Plans

Are you planning to spend three or more years in your location? If not, buying might not be for you. While most home loans have 30-year terms, that doesn’t mean you have to intend on staying in the home for a full 30 years, of course. However, if you’re planning a large move within three years after purchasing a home, it might be in your best interest to rent an apartment until you find somewhere you’d like to live for a longer period of time.

3. Your Financial Goals

Financial goals are another major considering when deciding on renting vs. owning. One wonderful thing about owning a home is that you will be making a sound, lower-risk investment into your financial future. When you rent an apartment or home, the money you spend each month on rent is money you will never see again. It goes to pay your landlord’s mortgage, in fact, so that he can make his financial goals come to fruition. When you own a home, you pay yourself each month by owning more and more of the property until you own it outright.

Your home is an investment in your future. With each payment you make, the amount of equity you have in your home will increase. The equity in your home can then be used to do things like pay off debt, make home improvements or repairs, send your kids to college, save for retirement, or even be put away into an emergency cash reserve fund to keep you and your family safe in case of a financial catastrophe such as a job loss.

You cannot do any of this while renting a home or apartment, so there is a clear and obvious advantage to home ownership in this regard. Learn more about cashing out and protecting your equity.

4. Home Upkeep and Repair Costs

Home ownership does have its costs. When you rent an apartment or home, your landlord is responsible for most of the repairs that will be necessary as the home and its contents age or are weathered or damaged. These costs can be considerable, ranging anywhere from less than a hundred bucks for something like a leaky faucet or a few blown-off shingles to thousands of dollars for a new roof or new windows. When you own a home, you’ll need to make sure you can pay for repairs if something goes wrong.

Luckily, homeowners also have equity on their sides. After a few or more years of living in your home, you may be able to utilize the equity to help make those needed repairs and upgrades. However, it should be considered in your decision making. You should definitely have a cushion of cash set aside in reserve to account for unforeseen emergencies such as these.

5. The Housing Market

One should also consider the current state of the housing market when deciding on renting vs. owning a home. How are interest rates? What are home values in the neighborhood in which you’re looking to live? What is the outlook on that neighborhood? Are home values there steady or increasing? Have they been decreasing? Consider all of this.

In terms of rent, consider the same. Look at the average cost to rent and decide whether or not that fits your budget and goals as well.

6. Your Credit

When considering whether to rent or buy a home, you’ll also want to give deep consideration to your credit status. How does your credit report look? Is your credit score healthy? Do you have collections, bankruptcies, tons of credit card debt, or other potentially negative items lurking on your credit report? Make sure you check all three of your credit reports and scores before even thinking of applying for a mortgage.

Some mortgages don’t require perfect credit, but in order to get the best rate, you’ll definitely want your credit to be in good condition. Work on paying off credit cards and fixing collections to make sure your credit is as good as it can be. If it needs work, you may have to rent while you position yourself to be better equipped to buy a home in the future.