“Buying a house is always better than renting.”
“Renting is throwing money down the drain.”
“You’re just building equity for someone else.”
Have you heard any of these lines before? They should be familiar to anyone who has been urged to jump into homeownership as quickly as possible. But are these statements actually true? Do you really need to buy a house or is renting the right way to go? The honest answer: It depends on your situation, your financial life and other goals. Here’s how to determine the right answer for you in the rent-or-own debate.
Don’t Buy If You Don’t Want to
A better question to ask than, “Should I buy a home or keep renting?” is whether you even want to buy a house or not. Many people face enormous social pressure to buy a house, especially if you’re getting married or starting your family. It’s what we “should” do, or just what you do next once you hit other milestones. (For related reading from this author, see: 5 Money Decisions You Might Regret Later in Life.)
But there’s nothing wrong with renting, especially if you like it. There are countless reasons why even Millennials prefer to rent. Here are a few:
Maintain flexibility. You aren’t tied to a house you would need to sell for a certain price before you could move to follow a career, a family member or wanderlust.
More free time. You don’t have the responsibilities that come with owning and maintaining the property. If you’re busy with friends, family and work, not spending your weekends working on your house could be valuable to you.
Other spending priorities. A down payment and the costs associated with a home can eat through your savings. Renting could allow you to save and invest more each month to reach goals that are a higher priority to you right now.
Determine What Is More Cost Effective
You might enjoy renting but still wonder if it’s the financially smart thing to do. The idea that buying is always better (or cheaper) than renting is a powerful one. Sometimes it does make more financial sense to buy your own home than to rent someone else’s. But that’s not always the case, especially in seller’s markets where all-cash offers, bidding wars and sales well over list prices are common.
You need to compare apples to apples to get an answer in the rent versus buy debate when it comes to which one is most cost effective. That means doing the math with your numbers. You need to look at your rent and current expenses and compare those to the cost of owning a home in the area you want to buy. That can get complicated, but a comprehensive financial planner can help you run the analysis. You can also use tools like The New York Times’ Rent vs. Buy Calculator.
It might be easier to make a decision once you can see what truly is better for your financial situation - renting or buying.
What Millennials Need to Think About Before Buying a Home
So maybe you do want to buy a home, even if it’s a little more expensive than renting. Great! Again, the first step in deciding what’s right for you is being honest about what you actually want. If you want to buy a home, then your next step is to determine if your finances are ready. How many of these statements are true for you?
I track my spending and keep a budget each month.
I rarely spend more than I make.
I’m on track with my retirement savings and can continue to contribute to my retirement if I bought a house.
I have no credit card or other “bad” debts - or, if I do, I have a plan to repay it and the monthly payments on the balances take up 10% or less of my available monthly income.
I have a reliable, steady income and I’m unlikely to lose my job.
I have savings available for a down payment that are separate from my retirement savings and emergency savings.
I want to stay in the same place for the next five to seven years and I’m unlikely to relocate for work.
The amount of house I want to buy would leave me with a mortgage payment I can afford. (For more from this author, see: How to Create a Budget You Can Actually Stick With.)
If most of these statements are false for you, you may need to spend more time getting your finances in order before throwing the added complication of a mortgage into your money picture.
Remember, the cheapest part of buying your home is your mortgage. Your monthly principal and interest payment is the least you’ll ever pay on a monthly basis. As a homeowner, you’re responsible for property taxes, insurance, repairs, upgrades and regular maintenance, which makes it highly likely your actual mortgage is the minimum you’ll pay for your home each month.
Again, buying a home is entirely possible but you must make sure your finances are in good health and you have a solid plan to follow before you take the leap. And whether you choose to rent for life or buy early on, you should make that choice based on your own personal, professional and financial situation. (For more from this author, see: 5 Ways to Stop Living Paycheck to Paycheck.)
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