There comes a time when you’re faced with the decision: rent or buy? Maybe your lease is just about up and you’re trying to decide if you want to keep going down this path of rent payments and year leases or if you want something more permanent, a place you can make your own. But then maybe you remind yourself that renting means freedom to roam and protection from the market.
So what to do? Let’s talk.
First – get a good feel for your finances
Before you start browsing through houses all haphazardly on Zillow you need to have a grip on your financial situation. It’s a
good idea to find a reputable lender in your area who can run your credit and assess your income and liabilities to determine if you qualify for a loan, and then how much you would qualify for. They can even discuss your long-term goals with you and help you figure out what sort of investment you want to make.
You’ll also want to discuss what kind of down payment you will need to come up with. If you don’t have a good lump sum to put down on a house, make sure you understand the financial consequences that may have on your mortgage and the overall cost of your house. This may be all it takes for you to decide to just keep renting and save up for when you’re ready. Finally, don’t forget about those transaction fees such as closing costs, insurance, as well as appraisal and inspection fees. They’ll sneak up on you if you’re not prepared.
Second – think even MORE about your finances
Yup. We’re not done yet. Now is a good time to sit down and calculate the monthly costs of renting versus buying. Once you know what you have for a down payment, what kind of loan you’re looking at, and what kind of house you can afford, you can get a good estimate of your monthly mortgage. Let’s not forget to factor in those extra costs like home insurance, taxes, HOA, etc. Can you afford that every month and still have some money to set aside for say, if a water heater should break down on some idle Tuesday?
Then there’s the cost of renting. Overall, it’s a pretty set number with renting. You have what you owe monthly and maybe some renter’s insurance if you’re smart. Should any big costs come up like the need for termite control or a new roof, well that’s not your problem. So at this point, unless you’ve got a lot of money in the bank, renting may sound like the best option. But here’s the kicker – all of those rent payments are going into someone else’s pocket and you’ve got nothing to show for it. This is the one financial area where buyers have renters beat – E Q U I T Y.
Equity – that six letter word you always heard adults use growing up and never quite understood. Equity is the source of every homeowner’s joy and every renter’s envy. Equity accumulates as the value of your home increases after you buy it. For this reason, most people see buying a home as an investment. While equity does take time to increase, most homebuyers go in knowing that and plan to live at a property for at least 5-10 years, something else to consider in the great debate.
For this reason, Zillow created a measure called the Breakeven Horizon. This estimates the number of years you would have to live in a home to make buying it more financially advantageous than renting it. Meaning, how long you’d have to commit to living in your home before you really saw some equity or at least broke even. In 2016, the metro area of Baltimore, Columbia, and Towson, had a median Breakeven Horizon of 2.5 years and a median Price-to-Rent Ratio of 12.3. That means you definitely want to plan on living in the Baltimore area for at least 3 years if you want this to be a financial investment.
Third- take a look around your market
Market factors will certainly play a role in the decision to buy. Typically, you’ll find that high rents, low interest rates, and reasonable home prices are all signs that point towards buy. On the other hand, higher home prices, high interest rates, and low inventory point to renting. It’s a great idea to find yourself a local real estate agent and ask these questions about your market before determining whether you want to keep renting or settle down for good.
Finally – go with what’s right for you
At the end of the day, buying a home is not – and should not be – about timing the market or making a financial killing. It’s about deciding where and how you want to live. If you’re on the go and not sure of where you’ll be in the next few years, maybe rent a cool place down by the water. Buying is a lifestyle choice. If you are in an area that you want to live in for the rest of your life (or at least for the unforeseeable future) then it probably makes sense to buy a place and work on that equity. Paint the walls, do some renovations, make it your own.
At the end of the day it doesn’t matter which path you do so with the knowledge you need to make the right decision for your situation. Hopefully, we’ve helped a bit here.