6 questions to ask when determining whether to rent or buy
Buying a house is a big decision, especially financially. And, once you start looking, it’s easy to get swept away by the allure of a home to call your own. You can picture it now… your sofa against that wall, with a beautiful lamp on the coffee table. Oh, and those throw pillows you saw at Home Goods!
Take a step back – and no, not to imagine how your canvas painting would look above the fireplace. Before you start planning your interior design to a T, think carefully about all aspects of home ownership versus renting. There’s a lot to consider that you often don’t think about when your head is filled with visions of décor and design, such as researching the rent in your preferred area such as the average rent in Louisville, Kentucky.
Before you sign a contract and rush off to the nearest Pier 1 or TJ Maxx, ask yourself these six questions to help you make a decision:
1. Is Home Ownership One of Your Life Goals?
Before the recession, many aspired to buy a house in order to achieve the American dream of upward mobility. However, times have changed. Myspace is dead, your AIM screenname is (hopefully) long forgotten, and you’re no longer obsessed with glitter. (Well, maybe.) It’s also harder to qualify for a mortgage now, and fewer people believe that home ownership is a good way to build wealth. Basically, it doesn’t matter whether you rent or buy anymore.
There are still many emotional reasons to dream of owning a home of your own. It’s fun to decorate and fix up your house, and knowing that your name is on the deed gives you those fuzzy feelings of safety and security.
So if buying a house is one of your life’s goals, great. But if it’s not, no big deal. You’ll be more likely to receive nods of agreement than skeptical glances when you explain your position to friends and family.
2. Do You Want to Live Here Long-Term?
You don’t have to be committed to living for the rest of your life in the place you currently call home, but if you’re going to buy a house, you should plan to stay for at least five years.
If you’ve been renting, you may not have thought too hard about whether your current location is the best town or neighborhood for you. And certainly you can’t predict everything that will happen in your life over the next few years. But here are a couple factors you should consider before putting down roots:
Proximity to current and future jobs: Will your commute still be manageable if you buy a house here? Many people are overly optimistic about their ability to tolerate a long commute, but those extra 15 minutes can make a huge difference. At a minimum, you’re giving up half an hour of your day – longer if there’s traffic. Plus, it’s a big expense to maintain a car and buy gas if you have to drive long distances back and forth from work each day.
Consider how close you are to your job and try to live near public transportation if you can. You should also plan for the possibility of switching jobs. Are there plenty of other companies in your field in the surrounding area? If the job hub for your career is elsewhere, you may want to think twice before buying.
Proximity to friends and family: Some people go to college far from where they grew up and stay in the area afterward for work. Others cross the country for an attractive job offer. Take a look around you. Do you have a lot of friends close by? What about family members? Not everyone wants or needs to be near family, but it can become more important as time goes on.
Comfort with the area: Are you a city person living in a more rural area for work? Do you really want a driveway and a backyard but your job just happens to be in a big city? Think carefully about how comfortable you are in the place you currently live. If you’d rather be somewhere else, you should probably postpone home buying until you can set yourself up in a setting you truly love.
Safety: Did you research local crime statistics before you signed the lease on your apartment? Many people go on first impressions and whether they “feel” safe in a neighborhood, but looking up the actual data can be illuminating. Check out City-Data.com for statistics on crime and other important information before you decide to buy.
3. Are Property Taxes Affordable?
Property tax rates vary from state to state, county to county, and even district to district. It’s easy to view the current and past amounts on real estate sites like Zillow. Obviously the most important figure is what you’ll pay now, but you can also glean helpful information from the tax history.
First of all, has the property been assessed recently? If it hasn’t been assessed since the current owner purchased the house, you could be in for an unpleasant surprise. If taxes have risen each year, look at how much they go up. An extra hundred dollars a year may not seem like a big deal, but when multiplied over years, increases in property taxes could end up taking a big bite out of your wallet. And you probably don’t want to have to give up your sushi money…
4. How Much Money Could You Save by Renting?
There are many nifty rent vs. buy calculators out there. This one from Realtor.com tells you how many years you’d have to own your house before it becomes cheaper than rent. It also breaks down the cost differences into monthly and yearly averages. If renting is significantly cheaper in your location, and it costs you less per month than a mortgage would, you could invest that money you’re saving.
5. How Stable Are Your Finances?
Before a bank will give you a mortgage, they’ll want to see proof of your income for at least the past year. So if you’ve just started a new job or received a raise at your current job, you should probably wait before you buy.
Here are some other important financial factors to think about before you start visiting all the open houses:
How much have you saved for a down payment? While it’s common to put down 5-10%, you’ll need to come up with at least 20% to avoid paying private mortgage insurance. A larger down payment will also reduce the amount of your loan and monthly payments.
Do you have a cushion for emergency repairs? Major home repairs such as a broken furnace needs furnace repair with the help of an emergency furnace repair specialist as soon as possible. These Emergency HVAC Repairs often arrive without warning and need to be fixed immediately. To avoid going into debt paying for common repairs, you should have at least $500 saved — and preferably more just for unexpected expenses. You can’t predict when, but they will happen.
What’s your credit score? Receive a free credit report from AnnualCreditReport.com. Your score will determine whether banks will give you a mortgage and also help you figure out what the interest rate will be — both are good to know before you decide to buy.
Do you have a lot of other debt? Banks will weigh your income and total debt when determining the amount to loan you. Even so, they’ll often qualify you for more than you can comfortably afford. You should take a good, hard look at your financial situation, including the amount of debt you already have. How long will it take you to pay it all off? If you’re already struggling and have a long way to go before shedding student loans or credit card balances, this may not be the best time to buy.
6. Are You Really Ready to Take the Plunge?
Ultimately, the decision to buy a house is about more than just data and plans for the perfect kitchen. It’s an important life change that is very personal. After you’ve crunched the numbers, turn to your gut. Do you still want to buy? If you’re ready to make the big commitment, find a real estate agent you can trust to guide you through each step of the process. Then settle in and enjoy your new haven!
