Thursday, August 20, 2020 / by Ken Couture
If you’re like most people, you’ve probably come across a dream home or two while scrolling through Zillow or another listing site.
But there’s a lot of space between finding your dream home and deciding to make the move from renting to buying. Your finances, lifestyle, and future plans are among the many factors to consider before deciding what makes sense for you. And in the middle of a pandemic, it’s even more complicated.
At the end of the day, if homeownership makes sense to you financially and personally, there are good reasons to buy. “One of the biggest ways of building wealth is through homeownership,” says Dr. Vivek Sah, director of the Lied Center for Real Estate at the University of Nevada, Las Vegas.
Here are four main questions you should ask yourself before buying a home:
1. How Long Do You Plan to Stay?
Buying a home is usually only a good idea if you’re planning to stay put for at least three years, says Sah. With the value of homes only increasing by 4 to 7.5% per year, you could pay more in closing costs than you’d earn in proceeds if you sell after only a year or two. Also, you could owe capital gains tax if you sell a home you’ve owned for less than two years.
You should also think about how much space you’ll need in the future if you plan to start a family or anticipate relatives moving in with you. A one-bedroom condo might not fit your lifestyle in a few years, so thinking through your plans and timeline can help you figure out when and what to buy.
For people who aren’t sure they’ll stay in one spot for more than a few years, such as students or people who just want to try out a new neighborhood, renting makes more sense than buying, says Virginia Gilmartin, manager of homeownership services at Urban Edge Housing Corporation, a Boston-area housing organization.
2. Have You Saved Enough to Buy a Home?
If someone can commit to staying put for at least a few years, Sah’s next question would be: “Do you have enough savings to buy a house?” He recommends having at least 20% of the price of the home saved up for the down payment. That way, he says, it will be easier for you to prequalify for a loan and you won’t need to get mortgage insurance.
But if you don’t have that much saved up, don’t just give up. “We don’t rush people into buying, particularly if they need to work on their credit and savings,” Gilmartin says. “We try to explain that it might make sense for people to continue to rent for 6, 12, or even 18 months and work on savings and credit … because the best mortgage products go to those with the best credit scores and down payments.”
If you think it makes sense for your situation to buy before saving up for a 20% down payment, a first time homebuyer grant or program could be an option worth looking into. Some buyers might also qualify for government-backed loans through the Federal Housing Authority, Department of Veterans Affairs, and U.S. Department of Agriculture.
Some of these programs only require a 3-5% down payment and also can help with closing costs, Gilmartin says. “We encourage people to have skin in the game, practice saving, and understand that their down payment is instant equity in the property that they’re buying.”
Working with a housing counselor can help you figure out if you’re financially ready to buy a home, and they can help you find a down payment assistance program. Unlike a real estate agent or mortgage lender, housing counselors don’t profit when you purchase a house. Many are free or inexpensive to work with, and operate with certification and oversight by the U.S. Department of Housing and Urban Development (HUD).
3. Can You Afford All the Extra Costs of Homeownership?
For many people, monthly mortgage payments can be less than monthly rent. In places where rent is particularly expensive, “it really does make sense to at least entertain and investigate the idea of becoming a homeowner,” says Gilmartin.
But your calculations shouldn’t stop at comparing rent and mortgage payments, because “those are not apples to apples,” says Sah. There are other costs associated with homeownership to consider, such as closing costs, insurance, property taxes, homeowner’s association fees, and maintenance.
“So many people will purchase a property and use every last cent they have … and because they used all of their money for the down payment and closing costs, they have nothing to keep up the home, and that becomes a pretty dire situation.
If you’re able to plan for these additional expenses, building equity in your own home offers long-term rewards you won’t get with renting. “Every month that you’re paying rent, you’re paying someone else’s mortgage,” says Gilmartin. And there are other benefits to owning, such as being able to deduct interest paid on a mortgage come tax time.
4. Are You Ready to Be a Homeowner?
Even if you can afford to buy, renting might be a better option based on your lifestyle and goals.
Again, if you plan to travel around and move frequently, you’re better off renting. Renting is also a good option if you’re not interested in maintaining a home. Homeownership can be a lot of work and when something breaks, it’s on you to fix it. There’s no landlord to call when your name is on the deed.
However, owning a house means you can personalize it to make it a home. You can paint the walls, knock out the kitchen cabinets, and retile your shower if you want to. So you’ll need to weigh the hassles you’ll have to deal as a homeowner against the personalized touches and upgrades you’ll be clear to do in a home you own.
And if you’re not sure, waiting and saving will only put you in a better position to buy in the future.
Figuring out whether to buy or rent is a financial decision with many factors and long-term consequences. While the mortgage interest rates are as low as they’ve ever been this year, the pandemic and its effects on the economy complicate the decision further.
Thinking through how long you plan to stay in your next place, and what your savings and budget for unexpected expenses looks like can help you figure out whether it makes sense to rent or buy your next home.
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