Should I Rent or Own a Home?
- December 13, 2019
If you’re renting but want to buy a home then here are some guidelines to help you determine which option is best for you. The most important thing is making sure you won’t be burdened financially by buying a home. This can happen in three ways:
- Unaffordable monthly housing payment
- Using most or all of your savings to buy a home
- Unexpected costs.
Housing Payment to Income Ratio
Affordability is an important factor when considering if to rent or own a home. Affordability can be measured by how much your monthly housing payment will increase. This is commonly referred to as “payment shock”. For example, if your rent is currently $1,000/month and your housing payment would jump to $1,500/month after buying a home, then this is a 50% payment shock, which might be unaffordable for you. To figure out what you can afford, divide your monthly housing payment by your gross monthly income. You want this number (your housing Payment to Income ratio, or PTI) to be no higher than 30%.
So, if you earn $5,000/month, your monthly housing payment shouldn’t exceed $1,500. A high payment shock might be manageable if your new housing payment doesn’t exceed a 30% home payment to income ratio. So make sure to check both of these numbers. You can price out your specific scenario and estimated monthly by viewing our current mortgage rates to get a sense of your costs.
Hold Something Back
The second factor when determining if to rent or buy a home is the upfront money that is needed to buy the home. You can put down as little as 3%, or $9,000 on a $300,000 property. Regardless of down payment, make sure you have money left over after closing on your new home. Two months of expenses is a good starting place. If you have any unforeseen expenses after closing you don’t have to choose between paying your mortgage and dealing with that new expense.
Always Be Prepared
The last hurdle is unexpected costs. The monthly housing payment for owning a home isn’t just the monthly mortgage payment. So, what is included in a monthly housing payment? It also includes property taxes, homeowner’s insurance, mortgage insurance (if applicable), and homeowner’s association dues (if applicable). These expenses can add up depending on where you live and the type of property you buy.
Deferred maintenance, repairs, and capital expenditures are other unexpected costs. These are industry terms for repairs that the seller neglected to complete and major system replacements that will be needed at some future point (i.e. replacing a roof or a water heater). Get an inspection when you buy a home to discover these issues. You can then ask the seller for a discount to the sale price to cover them. You should also start a savings fund to cover future repairs and major replacements. Without going into too much detail I would recommend $0.60/square foot/year, which comes out to $100/month for a 2,000 square foot home.
Still wondering if you should rent or own a home?
The Upside of Homeownership
All these financial burdens make homeownership sound daunting but there is a lot of financial upside as well. You are buying an appreciating asset and hopefully you will own it outright 30 years from now. This is a key way to build wealth and legacy. By paying a mortgage instead of rent, you are slowly increasing your ownership percentage in your home as opposed to just paying your landlord’s mortgage.
If you need cash to pay for college or home improvements, you have the option to borrow from your excess available equity. When you sell the home you can use that money for retirement or to downsize in retirement while still reserving some cash. You can take out a reverse mortgage once you turn 62 and actually get paid to live in your own home.
So, if you’re asking yourself “should I rent or own a home?” the main takeaway here is the options are plentiful if you own vs. rent so if it’s affordable, then I would highly recommend it.