Choosing whether to rent or buy is often difficult for many Americans. Renting has benefits like no property taxes, no association fees, no maintenance costs and more flexibility, but buying means you own your home and are building equity in that investment.
According to Trulia.com, it is 33.1 percent cheaper for U.S. homeowners to buy, assuming they move every seven years and put down 20 percent of the purchase price. There are many benefits to owning a home in addition to financial savings, like tax deductions for the mortgage interest, freedom to renovate and fixed housing costs.
According to Abby Ulm, Manager of the Center for Financial Empowerment, there are additional items to monitor while weighing buying versus renting.
“Typically rent payments are lower than mortgage payments, since mortgage payments usually include taxes and insurance premiums added onto the loan principal and interest,” says Ulm. “However, rent prices in some markets have risen so significantly in recent years that this may not necessarily be the case. Higher rents make it more difficult for the average renter to save a down payment in order to eventually buy a home.”
Abby recommends that potential homebuyers consider how stable their income is before buying, and also provided a few questions you should answer before jumping into home ownership.
- Have you earned your primary source of income consistently for several years?
- How likely is your primary source of income likely to continue for the next 30 years?
- Do you have a secondary source of income and is it long-term?
- Do you have the ability to increase your secondary sources of income if something were to happen to your primary income?
If you’ve made up your mind to purchase a home, here are five useful points to consider before making the leap.
1. Debt: Financial experts suggest eliminating as much non-mortgage debt as possible prior to purchasing a home. For someone looking to buy a home this means eliminating credit card debt, car loans and, if possible, significantly cutting down student loan debt. Studies of mortgage loans suggest that borrowers with a higher debt to income ratio are more likely to run into issues making monthly payments.
2. Credit: Having good credit can make your ability to secure financing for a home easier or improve your chances for getting your rental application approved. Credit can also impact your mortgage payments. FICO scores run from 300 to 850 and the higher the score, the lower the perceived risk for the lender, which could qualify you for lower mortgage payments. If your credit is not quite up to par, consider continuing renting while you work to improve your score.
3. Research: Prepare to do a lot of research before purchasing a home. For example, location can determine if and how much your home appreciates in value. Look into tax rates, schools in the area and community resources like fire and police departments, grocery stores and financial institutions. If you are unsure about a neighborhood or area of town, renting may be your best option until you learn more about where you’d like to live. Research mortgage lenders who fit best based on your income, savings, credit score and budget.
4. Budget: No matter whether you are renting or buying, a budget is essential. Budgeting can help you eliminate debt, improve your credit and save money. Little things like bringing your lunch to work can cut out unnecessary expenses that can be deposited into your savings account. With lunches averaging $11 a day in 2015, eliminating one day of eating out for lunch could save you more than $500 a year.
5. Savings: If you’re in the market to buy a home, setting aside a significant amount of cash is necessary for your down payment and can also be used to furnish or renovate your home. Experts note the ideal down payment for a home purchase is 20 percent of its price.
As you consider whether to rent or buy, be sure to factor in insurance costs to ensure your property will be adequately covered in the event of an unexpected or unforeseen loss.