Buy Now or Keep Renting?

Buy Now or Rent Longer?

5 Questions to Answer
Before Purchasing Your First Home

Deciding whether to jump into the housing market or rent instead is rarely an easy decision.  Especially if you’re a first-time homebuyer. But in today’s ever-changing market, you may find it particularly challenging to pinpoint the best time to start exploring homeownership.

A real estate boom during the pandemic pushed home prices to an all-time high.¹  With higher mortgage rates, would-be buyers are wondering if they should wait to see if prices or rates come down.

But is renting a better alternative? Rents have also soared along with inflation – and are likely to continue climbing due to a persistent housing shortage.² While homebuyers can lock in a set mortgage payment, renters are at the mercy of these rising costs.

So, what’s the better choice for you? There’s a lot to consider when it comes to buying versus renting. You may find it helpful to ask yourself the following questions:

1. How long do I plan to stay in the home?

You’ll get the most financial benefit from a home purchase if you own the property for at least five years.³ If you plan to sell in a shorter timeframe, a home purchase may not be the best choice for you.

There are a lot of costs associated with buying and selling a home.  And it may take time for the property’s value to rise enough to offset them.

Housing markets can shift from one year to the next.  You’ll typically find that a home’s value will ride out a market’s ups and downs and appreciate with time.⁴ The longer you own a property, the more you are likely to benefit from its appreciation.

When you find a community that you’d like to stay in for several years, buying over renting can pay off. You’ll both benefit from appreciation and build equity as you pay down your mortgage.  The combination provides more security and stability overall.

If you plan to stay in the home for the life of the mortgage, your mortgage payments will ultimately disappear. As a result, your housing costs will drop dramatically, while your equity (and net worth) continue to grow.

2. Is it a better value to buy or rent in my area?

If you know you plan to stay put for at least five years, you should consider whether buying or renting is the better bargain in your specific area.

One helpful tool for evaluating your options is a neighborhood’s price-to-rent ratio. Just divide the median home price by the median yearly rent price. The higher the price-to-rent ratio is, the more expensive it is to buy versus rent.⁵ Keep in mind, though, that this equation only provides a snapshot of where the market stands today. As such, it may not accurately account for the full impact of rising home values and rent increases over the long term.

According to the National Association of Realtors, a typical U.S. homeowner who purchased a single-family existing home 10 years ago would have gained roughly $225,000 in equity — all while maintaining a steady mortgage payment.⁶

In contrast, someone who chose to rent for the past 10 years would have not only missed out on those equity gains, but they would have also seen U.S. rental prices increase by around 66%.⁷

So, even if renting seems like a better bargain today, buying could be the better long-term financial play.

Ready to compare your options?  I’d be happy to help you interpret the numbers to determine if buying or renting is the better value in your desired neighborhood.

3. Can I afford to be a homeowner?

 If you determine that buying a home is the better value, you’ll also want to evaluate your financial readiness.

Start by examining how much you have in savings. After a down payment and closing costs, will you still have enough money left over for ancillary expenses and emergencies? If not, that’s a sign you may be better off waiting until you’ve built a larger rainy-day fund.

Next, consider how your monthly budget will be impacted. Remember, your monthly mortgage payment won’t be your only expense going forward. You may also need to factor in property taxes, insurance, association fees, maintenance, and repairs.

You could find that the monthly cost of homeownership is comparable to renting, especially if you make a sizable down payment. Landlords often pass the extra costs of homeowning onto tenants, so it’s not always the cheaper option.

Even though you’ll be responsible for financing your home’s upkeep if you buy, you’ll also be the one who stands to benefit from your investment. Every major upgrade not only makes your home a nicer place to live, but also helps boost your home’s market value.

If you want to buy a home but aren’t sure you can afford it, give me a call to discuss your goals and budget. Together, we can come up with a realistic assessment of your options to help you determine if your homeownership dreams are within reach.

4. Can I qualify for a mortgage?

If you’re prepared to handle the costs of homeownership, you’ll next want to investigate how likely you are to get approved for a mortgage.

Every lender will have their own criteria, but generally speaking, you can expect a creditor to scrutinize your job stability, credit history, and savings to make sure you can handle a monthly mortgage payment.

For example, lenders like to see evidence that your income is stable and predictable. If you’re self-employed, you may need to provide additional documentation proving that your earnings are dependable. A lender will also compare your monthly debt payments to your income to make sure you aren’t at risk of being or becoming financially overextended.

A lender will also check your credit report to verify that you have a history of on-time payments and can be trusted to pay your bills. Generally, the higher your credit score, the better your odds of securing a competitive rate.

Whatever your circumstances, it’s always a good idea to get preapproved for a mortgage before you start house hunting. If you’re interested, I’d be happy to give you a referral to a loan officer or mortgage broker who can help.

5. How would owning a home change my life?

Before you begin the preapproval process, it’s important to consider how homeownership would affect your life, aside from the long-term financial gains.

In general, you should be prepared to invest more time and energy in owning a home than you do renting one. There can be a fair amount of upkeep involved, especially if you buy a fixer-upper or overcommit yourself to a lot of DIY projects. If you’ve only lived in an apartment, for example, you could be surprised by the amount of time you spend maintaining a lawn.

On the other hand, you might relish the chance to tinker in your very own garden, make HGTV-inspired improvements, or play with your dog in a big backyard. And if you’re more social, you might enjoy hosting family gatherings or attending block parties with other committed homeowners.

The great thing about owning a home is that you can generally do what you want with it – even if that means painting your walls fiesta red one month and eggplant purple the next!

The choice – like the home – is all yours!

HAVE MORE QUESTIONS?

The decision to buy or rent a home is among the most consequential you will make in your lifetime. Let me make the process easier by helping you compare your options using real-time local market data. Don’t hesitate to reach out for a personalized consultation, regardless of where you are in your deliberations. I’d be happy to answer your questions and identify actionable steps you can take now to reach your long-term goals.

The above references an opinion and is for informational purposes only.  It is not intended to be financial, legal, or tax advice. Consult the appropriate professionals for advice regarding your individual needs.

Sources:

1. CNN –
   https://www.cnn.com/2022/08/11/homes/home-prices-second-quarter/index.html
2. NPR – https://www.npr.org/2022/07/14/1109345201/theres-a-massive-housing-shortage-across-the-u-s-heres-how-bad-it-is-where-you-l
3. Bankrate –
   https://www.bankrate.com/mortgages/5-year-real-estate-rule/
4. Federal Reserve Bank of St. Louis –
   https://fred.stlouisfed.org/series/MSPUS
5. National Association of REALTORS – https://www.nar.realtor/blogs/economists-outlook/price-to-rent-ratios-by-state-from-2014-2019
6. National Association of REALTORS –
   https://www.nar.realtor/blogs/economists-outlook/single-family-homeowners-typically-accumulated-225K-in-housing-wealth-over-10-years
7. Statista –
   https://www.statista.com/statistics/200223/median-apartment-rent-in-the-us-since-1980/