Given my financial situation, is it better for me to buy a house or continue to rent?
You don't state your salary or your expected living needs once the kids are grown and gone. But given what you have told us, it's clear that you are not even close to having enough to retire on. You need roughly 20 times your annual living needs, after deducting any steady income (such as Social Security or a defined-benefit pension). So don't start feeling flush and overextend yourself. You should probably be putting (or trying to put) 20% of your gross salary away into savings every year. This number inclludes all savings types. If you put a payment down on a house and take on a big mortgage you will most likely be unable to retire comfortably. Don't fall into the trap of thinking that your house is a vehicle to build savings. Too many people find themselves "house-poor" in old age and unlocking your home equity can be expensive or disruptive.
It is wise for you to look at your financial situation in trying to find out if you can afford to buy a home. At first glance, it seems like you have plenty of savings and are able to save from the income you are making. However, there is a lot of information missing:
1) How were you able to accumulate these funds? Did your cash savings come from inheriting money or from earned income saved?
2) Where do you live? How much is a home that you would like to purchase around you?
3) You also need to find out if home ownership is for you. Some people do not really want to own, and that's okay. There are a lot of responsibilities that come from purchasing a home, and having someone do all of these things for you might not make financial sense.
Home ownership is a great way to help you grow wealth. You could use some of your cash savings for a down deposit and I would recommend that your home expenses (mortgage, real estate tax & insurance) are about 25% of your net income combined (or less). I also recommend that you use a 15 or 20-year mortgage. This should help you build equity faster.
There are a lot more to look into before you make you decision than what you shared with us. But it seems like it would be a good idea for you.
I hope this helps.
Generally speaking, it is better to buy a home than it is to rent. The odds are you will be spending about the same every month, and in return, you will own a home that will provide you equity in the future if you need it.
Hi! Thanks so much for writing – it sounds like you and the kids are doing all the right things financially. That’s great! It’s such a hard decision to know if it is better to rent or buy. On the surface it seems as if buying a home and “building equity” is always smarter than “throwing money away on rent” as it is often presented. In reality, buying a home has many advantages, but it’s not always the right thing to do. Even though it may feel like you are throwing away your money, renting can have advantages over buying. The primary advantages to renting come when your future has specific uncertainties in it:
Job status – if you think that you may be laid off or that your company might close or relocate in the next two years, renting is better than owning. More positively, if you see yourself in the running for a promotion or a relocation, renting will give you more flexibility to go.
Romantic status – your love life, good or bad, should affect rent-vs-buy decisions. If you are falling in love (or, more sadly, out of love) and think you may want to begin living with (or stop living) with your partner, you want to be wary of buying something that may not work.
Local real estate status – regional housing markets rise and fall. We bought our first house in Connecticut in the late 1980s as interest rates AND housing prices were rising. We moved 2 years later and were lucky to sell that house for what we had paid for it; friends who moved a year later were upside down on the mortgage because by then housing prices were dropping. That house was a burden to them for years until they finally sold at a loss. Before you buy, figure out what’s going on with the local real estate market so that you don’t end up buying at a high price and then taking a loss when you have to sell at a low price. Also, if you are in a seller’s market in your town, you might be priced out of the market right now and end up paying too much for your home.
Financial status – just because a lender says you qualify for a mortgage doesn’t mean that it is something you can afford. Only you know your spending habits and your earning power. When you rent and get into financial difficulty, you can always move to a cheaper place. When you own a place and owe a mortgage, you are stuck there and must meet the monthly payments or risk foreclosure.
Emotional Status – you don’t really like the area you’re currently living in even though everyone says you “should love it,” but you just don’t; you aren’t ready to be tied down; you don’t feel like dealing with maintenance, repair, decorating, yardwork, etc.; are not into paying real estate taxes if you are in an area that has high taxes; or a parent or sibling is not doing well and there is a chance you may need to move nearer to them to help them.
Parental Status – you’ve got three kids, so their needs factor in too. If you have them in public school and zoning in your town is changing, it might be good to rent so that you can be sure you’re living in the school district with schools best suited to their needs. If they are all wanting to go to college, you might want to move to a state that offers more help for in-state college students. Also, if you’re not married to the other parent and that person moves, you might want to be able to move to a place closer so the kids can easily spend time with both of you.
There really is no “right” answer on whether to buy or rent, and it’s an important decision that you really have to think about. Buying a home is an action that’s easier to get into than to get out of – much like marriage or pet ownership or a short haircut. I wish you the best of luck and hope that you’ll write back to us with more questions!
Owning is better than renting over the long run because if fixes your housing costs. Unlike rent, your mortgage payment does not go up every year, and each passing year sees more of the mortgage being paid back to you in the form of increasing equity. However, not everyone is prepared to buy a home. It appears you have the funds for downpayment, so that is no problem. What we don't know is your income and credit standing. Given your age and the fact that you also need to also be saving aggressively for retirement (15-20% of income), I would encourage you to keep home purchase to what you can afford using a 15 year mortgage, with payment no more than about 20% of your income. (that said, if you are already paying more than this in rent, it might be ok to go up to 25%). Finding a CFP or financial coach to help with the decision might be a good investment.