4th Quarter 2016
Should You Rent or Buy a Home?
Buying a home may be your dream, but it’s not always the best financial decision. That painful lesson was learned by many people when the housing bubble burst and they owed more than their house was worth. Take stock of your finances and other matters before deciding to rent or buy:
- Consider how long you plan to live in the area. People who had to sell before prices rebounded from the downturn suffered the most financial pain. Think carefully about the stability of your job and other factors when assessing whether you’ll be able to stay put for at least five years. And consider the rental prospects if you do have to move during a down market. Could you rent out the house for enough to cover the mortgage, utilities, and any rental management costs?
- Compare the monthly cost of renting versus mortgage payments in your area. Keep in mind that rental costs can increase, but your monthly mortgage payments are locked in for the term of a fixed-rate loan – usually 15 or 30 years. You can also deduct your mortgage interest on your tax return if you itemize but you can’t deduct rent.
- Consider the additional monthly costs of homeownership, not just the mortgage payments. You’ll also be responsible for utilities, property taxes, homeowners insurance, maintenance, and may have unexpected expenses, such as a new roof, washing machine, or hot water heater. Be prepared, and keep extra money in an emergency fund that you can tap quickly for home repairs.
- Calculate how much home you can afford. One key factor lenders consider is your debt-to-income ratio, which is all of your monthly debt payments divided by your monthly income (before taxes). Lenders often look for a debt-to-income ratio of 43 percent or less.
- Build up a down-payment fund. You’ll generally get the best mortgage rate and have the most options if you make a 20 percent down payment. While you’re renting, set aside money every month for your down-payment fund and work on improving your credit score, which will also help you qualify for a better rate.
Check out the Consumer Financial Protection Bureau’s Owning a Home resources at www.consumerfinance.gov/owning-a-home for information to help you prepare to buy a home and shop for a mortgage.