By Kevin Simpson
The timing of when you buy a house is extremely important. Perhaps you are ready for more space to add a home office, want a guest bedroom or larger garage, or just want to have yard space for your dog. Just because you want a large property doesn't mean you are ready to buy one. Deciding whether you should continue to rent or take the plunge and buy your own home depends largely upon your financial situation and a few other factors.
Homeownership is satisfying and a mark of your own success as an adult in the world, but it also requires ongoing maintenance and can ring up unexpected costs. Contrary to the popular belief that buying a house is necessary to being an adult, the real sign of growing up is taking control of your money. Buy a house when you are ready, not because you feel pressured to or want to keep up with your work colleagues or friends. Homeownership is a major purchase. Do it when you are ready and it is right for you.
Signs You Are Ready to Buy a House
Here are five signs you are financially ready to buy a home:
- You are free of debt: Buy a home after you have paid off your student loans and do not have any consumer debt.
- You have an emergency fund: You need to have an emergency fund of at least three to six months of cash available to cover unexpected expenses and unforeseen situations such as losing your job, having an accident, medical bills and more. When you have a mortgage, you have to make that payment even if you don't have a job.
- You have your down payment ready: Putting down 20% or more of the total cost of your home for a 15-year fixed rate mortgage is advisable. Otherwise you will pay for private mortgage insurance and ultimately more for the cost of the home. (For related reading, see: 5 Reasons to Save for a Big Mortgage Down Payment.)
- You can afford a mortgage payment: Aim for a mortgage payment that is 25% or less of your take-home income per month. This ensures you will have enough cash to cover your other expenses, like food, health insurance, travel expenses, retirement and more.
- You are staying local for three years or more: Buy a house in an area you intend to live in. If you do not like the area, buying a house in the area is not a good decision, even if you found a great home that is a wonderful deal.
Buying real estate is more about financial preparation than market dynamics. When you are financially ready to buy a home, you can make the move if you find the right house that meets your needs.
Benefits of Homeownership
Buying a home gives you complete ownership, whereas with renting you are spending money on monthly payments without any return. Most homes increase, or appreciate, in value, which means you can earn money from the sale of your home. Many homeownership costs are tax deductible, such as property taxes and mortgage interest. (For related reading, see: Tax Deductions on Mortgage Interest.)
When you own your own home, you can make changes whenever you like. You can renovate the house as you see fit, paint it the way you want and live how you choose. You also benefit from having more privacy compared to living in an apartment. In an apartment, you can often hear your neighbors above, below and beside you at all hours of the day and night.
Finally, when you buy you have the satisfaction of being a homeowner.
Disadvantages of Homeownership
There are some disadvantages to owning a home. One disadvantage is you limit your ability to travel or relocate. If you want take a trip for three months or more, you may find it difficult to do so when you have a monthly mortgage and maintenance costs. This could also be a disadvantage if your company moves your job to a new location or you get a new job.
You have more expenses, such as: homeowners' insurance, flood insurace, property taxes, homeowners' association (HOA) fees and higher utility bills. When something breaks in your home, it is up to you to pay for it. You are responsible for all expenses and maintenance, from keeping the lawn trimmed to fixing holes in the roof.
3 Signs You Should Rent
Next, let’s take a closer look at renting. When you rent, it may seem like you are wasting your money by giving it to your landlord instead of investing it in your home. However, renting is usually necessary at some point in your life, and there are some situations where renting is better than buying.
- You have debt: If you have student loans, credit card debt or personal loans to pay off, keep renting your apartment. Renting will offer you the opportunity to get rid of your debt faster and also to save for a down payment on your future home and an emergency fund. Just to be sure to rent an apartment you can afford and does not consume your entire monthly income.
- Your job makes you relocate: Some jobs at companies or in the military require you to move. If you are unable to stay in an area for two to three years, buying a house is not worthwhile for you.
- You are unsure and need a plan: Whether you just graduated college, got married, recently moved to an area or are just unsure of whether you like a particular area or the type of house you want, you can wait to buy. Buy your house when you have a plan and know what you want. Avoid feeling guilty about renting until you are sure of what you want to do. (For related reading, see: Reasons Renting Is Better Than Buying.)
Benefits of Renting
When you rent, you are free to move when you want. If you want to take a year and travel the world, you can. It is easier to get out of a lease than it is a mortgage. If the roof is leaking, you have a toilet that doesn't flush or your pipes burst, you are not responsible for maintenance. You can call the landlord. A big advantage of renting is not having unexpected home repair costs. Just be sure to have renter’s insurance to cover your valuables in your apartment.
Disadvantages of Renting
There are some disadvantages of renting, such as increasing rental rates due to inflation, competition and changing property values. You do not get any tax deductions for renting. You also cannot make a lot of changes to the property you rent. Your landlord might let you paint the walls, but ripping out a wall or adding in new flooring is usually not an option. You also may have loud neighbors in your building or related factors you cannot control that you find annoying or difficult to live with.
While renting may seem cheaper at the onset than buying because homeownership involves maintenance, property taxes and homeowner’s insurance, things look different over the long term. A 2017 study by Trulia revealed that buying a house today at the national median cost of $289,801 and living there for seven years would save 33.1% of your money compared to renting the same space. This is because inflation works to your benefit when owning a home. Your house will continue to appreciate every year while you are paying down your mortgage principal and have fixed costs. This results in more money for you.
Deciding whether to rent or buy is a very personal and major life choice. Using the tips above, you can be better prepared and more comfortable in the decisions you make. Carefully consider the advantages and disadvantages of renting and buying and make the decision that is right for you.
(For more from this author, see: Buying a House? Here Are 6 Things You Need to Do.)
This article was originally published on Investopedia.