It’s the age-old question: Should you rent or buy? Depending on who you ask, you can get different answers, all with very compelling reasons. Your parents might tell you how necessary homeownership is and how easy it is to buy (especially if they bought their home back in the 70s or 80s). Your friends might tell you how unnecessary homeownership is and tell stories of the many trips taken and countries visited. That realtor you met will tell you that if you don’t buy today, rising interest rates and inflation will force you to live on the street tomorrow.
There are so many factors to consider and questions to ask yourself:
- Are you ready to settle down?
- Do you still want to explore another city?
- Can you afford it?
- How long will you be able to stay in your current home?
Bottom line: it’s a very personal decision, which can change as you progress through life. And there’s nothing wrong with that.
Here are the top considerations for whether you should rent or buy your home:
Reasons to rent
You want the flexibility to move
Whether you’re 28 or 38, you might not be ready to settle down. Maybe you’ve been living in Southern California your whole life and want to experience New York. Or maybe you’re from the midwest and want to live near the beach.
When you’re renting, the major expenses involved in moving are the security deposit and transporting your personal belongings. You don’t have to worry about fixing up your home, meeting with realtors, open houses on the weekends, and paying sales commissions. It’s much more expensive and time-consuming to move when you own your home.
You can’t afford to buy
This one might seem very straightforward, but it can also be a hard pill to swallow for some. Based on your current income, expenses, and savings, can you afford a down payment, mortgage, and property taxes? If you live in the Bay Area, it can seem near impossible.
Let’s say your current rent is $2,000/ month. After all other expenses, you’re saving an extra $1,000/ month, and you already have $10,000 saved. If you’re looking at buying a $600,000 townhome, a 10% downpayment ($60,000) would bring your monthly mortgage payment to about $3,500 (including property taxes, home insurance, and other fees). In this example, you’re not quite ready to buy or you need to adjust your price range.
You prefer to travel
What if you’re never “home”? You could be traveling every week for work, or visiting other countries for pleasure. With the rise of working from home, many people are choosing to take advantage of furnished, short-term rentals around the country and abroad.
For asimilar cost of a mortgage payment, you could live in Los Angeles for a month, and then in Austin, Miami, or New York. Some might equate this to burning money, but when else in your life will you have the opportunity to live in and experience these various cities? It’s okay to spend money if it improves the quality of your life.
Reasons to buy
You want to settle down
Maybe you’ve already filled your travel fix, or you’re married and ready to start a family. Setting your roots and having a place to call your own is important to many people as well. Plus, who enjoys packing up their clothes and dishes, and moving every year or two?
The general rule of thumb is that you should buy your home if you plan to live in the same place for five or more years. The reason is that the majority of your mortgage payments (over 65%) will go towards paying interest for the first 7 years of a 30-year mortgage.
You want to build equity
Equity, equity, equity. People love to talk about how much equity they have in their home. But what exactly does that mean? When most people purchase a home, they usually pay a portion of the sales price (down payment) and take out a mortgage (loan) for the remainder of the amount. Equity represents the portion of the home that is not subject to the loan. As the home appreciates (increases in value), your equity will also increase.
For example, let’s say you purchased a $500,000 home with $50,000 down. Your equity in the home is $50,000. But if the home then appreciates to $600,000, your equity is now $150,000. Just like with investing, appreciation is not guaranteed, and there is always a risk that your home could decrease in value.
You want to make your home yours
My wife and I joke that she makes our house a “home” since I’m not much of an interior decorator. When you own your own home, you can customize it to whatever you want. Do you prefer hardwood floors over carpet? Want an island in your kitchen for more countertop space? You’re free to make these changes as you please.
When you rent, you don’t have the luxury of making major improvements or renovations. In fact, you will usually need to work with your property manager before any changes can be made. Owning your home gives you the creative freedom to customize it to your needs, wants, and desires.
The decision to rent or buy your home is just as personal as it is financial. If you would like to work with a financial planner to walk you through your options, I would love to help you!
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Disclaimer: This blog is for informational purposes only, and should not be considered advice or recommendations. All opinions expressed herein are solely those of Amaral Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made to another parties’ informational accuracy or completeness. You should consult your financial advisor, tax professional or legal counsel prior to implementation.