This post is part of our financial myths series
You may have heard that it’s always better to buy than rent. I would imagine that the thought behind this is that you are building equity when you buy. When you rent you’re just “throwing money away”. Or when you rent you’re “paying someone else’s mortgage”.
Here are some factors to consider
What if you don’t know how long you’ll be staying in your present location? Try adding up closing costs for a new home and mortgage, possibly personal mortgage insurance, property taxes, as well as mortgage interest. Throw in the cost of any repairs or renovations. And now imagine having to pick up and move only two years later. Doing that over and over again is going to get mighty expensive.
An important consideration in the rent versus buy question is how long you think you will be staying in your home. When you spread all those costs over 10 years it’s not so bad. However, when you spread those costs over only two years it’s a different story.
Is an appropriate home available?
Rushing into the purchase of a home when there are no appropriate homes available is setting yourself up for grief. We are talking about what may be the largest purchase of your life. While your relocation may have been unplanned or even forced, that does not mean that you have to rush into purchasing a home. Renting in your new area for a period of time before settling on a particular neighborhood might be the best way to go. You’ll have the opportunity to learn more about your neighborhood, other nearby neighborhoods, and other pros and cons that are not easily observable when you’re just searching for a house.
What do interest rates look like?
If you just happen to be looking for a new home at a time when interest rates are sky high, it might make sense to rent for a period of time. Yes, if you purchase you can refinance in the future. But refinancing has its own costs. This goes back to how long you will be spreading those closing costs. Spreading the closing costs from purchasing your home over only a couple of years before refinancing means it was a very expensive couple of years.
What homes are available for purchase?
What does the current inventory of available homes look like? Is there a home that fits your family’s current needs and future needs available right now at a reasonable price? Moving is expensive – both financially and emotionally. If you have young children, would you be willing to uproot them from their school when you find a better or more appropriate home in just a few years?
Real estate values don’t always go up
Barring any extenuating circumstances, real estate values generally go up over the long haul assuming that maintenance and upkeep are being done consistently. However, sometimes there are circumstances that are beyond your control. If you are the only ones keeping up your home in your neighborhood, your property value will probably decline in spite of your efforts. If a large industrial complex is built near your home, you may also find that your property value declines. Sometimes regional economics are just not in your favor and property values decline. Can you financially withstand a significant drop in property value? If not, this may not be the right time in your financial journey to purchase a home.
Will you be house poor?
Do you have the financial resources to support the true cost of owning a home? While it may be true that you may be able to count on future raises and promotions which will free up some cash flow, that will take time. If your finances are very tight due to mortgage payments, property taxes, utilities, maintenance and upkeep, you could be very uncomfortable. In addition to these ongoing expenses, you would like to furnish your home. And, if all of your financial resources are going just to support your home you may become burnt out and resent owning that home.
A homeowner is taking on risk
When you own a home you are taking on risk. There is the risk that the market declines and you ultimately owe more on your mortgage then you can get by him selling your home. There’s the risk of damage to the physical house. Yes, there’s insurance. But there’s also premiums, deductible and the hassle of dealing with repairs and replacements.
When you rent, you don’t have to take on the risk of the property value declining. If the neighborhood starts to change you can easily pick up and go elsewhere. If your career takes you to a different part of the world you can easily pick up and move. And rather than being responsible for the entire structure, you’re only responsible for your own belongings (yes, you will need renter’s insurance).
There are many factors to consider when it comes to this question. As usual, the answer to this financial question is “it depends”. Regardless of your situation, you should never feel shamed into choosing to rent or to buy. It is a personal decision. And making a decision based on “rules of thumb” or peer pressure could cause a lot of regret for you. After all, those folks applying the peer pressure probably won’t be around to help if something goes wrong.