Renting vs Buying: Which is Right for You?
Not sure whether renting or buying makes the most sense for you? Use this helpful guide to making the best decision.
Are you looking at housing options and trying to choose between renting and buying? The choice between renting a home and buying one is among the biggest financial decisions you will make. Below, you will find a few of the factors you should take into consideration when determining whether renting or buying is the right choice for you.
How Long Do You Plan to Stay?
The answer to this question goes a long way to determining whether signing a rental lease or purchasing a home is the best option for you at this point in your life. If you want the flexibility to move to another city for a new job or even across town to another neighborhood you’ve had your eye on, then renting is the smart move.
Not only is renting more flexible due to lease lengths (month-to-month, 6-month, 12-month, etc.), but it also makes more sense financially. Buying tends to be better the choice for those looking to stay in the home because the upfront fees are spread out over many years. If you buy and then move soon after that, you are likely to take a loss financially.
Initial Costs of Renting Vs. Buying
Upfront fees mean that you need to take a long look at your bank accounts and determine what you can afford to pay in initial costs. When renting, your upfront costs will usually consist of the first month’s rent and a security deposit which is often the same amount as one month’s rent. On the other hand, the initial costs of buying a home may include a down payment (20% of purchase price to avoid PMI), earnest money, home inspection fee, and a variety of closing costs that need to be paid upfront and cannot be rolled into the mortgage.
As you can see, your bank account will take a much bigger hit when purchasing a home. So, if you have not saved enough money, then your only option, for now, is to rent your next home.
Recurring Costs of Renting vs Buying
After upfront costs, you must also take into consideration the recurring expenses of both renting and buying. Let’s start with renting. As a renter, you will not have to pay for property taxes, homeowner’s insurance, and, in the majority of cases, maintenance costs. You will most likely have utility bills to pay, and you should purchase renter’s insurance.
Owning a home, on the other hand, will require you to pay a larger dollar amount of recurring expenses. In fact, experts say these expenses can cost homeowners about 3% of the price of their home annually. Those costs include, but are not limited to, property taxes, homeowner’s insurance, maintenance and repairs, utilities, and homeowners association dues.
Local Housing Market
The local real estate market plays a big part in solving the renting versus buying equation. In some areas of the country, renting is the smart move financially. In these housing markets, even the out-of-pocket costs of a mortgage payment far exceed those of monthly rent.
Then again, you must also look at supply versus demand when determining whether renting makes more sense than buying. When the rental property supply is low, and the demand for rental homes is high, then that market will likely have high rental rates, which could make buying a home the best financial move.
To get a better understanding of your local real estate market when it comes to both buying and renting, you should speak with a real estate agent and property management company. Housing professionals like these will be able to provide you with answers to your questions and point you in the right direction. Contact us to learn more.
Consider Your Credit
How’s healthy is your credit score? Whether you are applying for a home loan or applying to rent a home, your credit score is a major deciding factor. In both cases, a low credit score could cause your application to be rejected. On the other hand, you may be able to get a mortgage, but that loan may come with a higher interest rate or a higher down payment. The same could hold true for renting. A lower credit score could mean that you must pay more in upfront costs including first and last month’s rent plus deposit.
In either case, working to improve your credit score is the smart thing to do. When considering whether to rent or buy, a low credit score may limit your options. Until you improve a low credit score, you may only have the choice of renting, especially since lenders require higher credit scores for home loans in today’s lending environment. Once again, to find out if you qualify for a loan based on your credit score, start by speaking with a professional.
Renting Vs. Buying Calculator
If you want to crunch the numbers to find out whether renting or buying makes the most financial sense for you, then a renting vs. buying calculator can be helpful. Here’s one which “keeps a running tally of the most common expenses of owning and renting. It also takes into account something known as an opportunity cost – for example, the return you could have earned by investing your money instead of spending it on a down payment.”
Ultimately, taking the time to do your homework will help you make the best decision. Also, make sure to enlist the help of housing professionals who are willing to answer your questions and share their expertise. The more due diligence you put into this decision, the more likely you will be to make the most financially sound decision. Have any questions you would like answered; please contact us at Red Door Company. We are more than happy to help!