The Decision to Buy or Rent:
There comes a time in life when we all move out of our parent’s house – whether it’s leaving for college, getting a job and seeking independence, or simply being forced to fend for ourselves, we’ve all had that “first place of our own.” Each story is unique, just like everyone’s financial situation uniquely dictates whether they rent or buy their place of residence.
There’s no question that owning a home has both its advantages and disadvantages, and the same can be said about renting. In this article we will explain some of the reasoning behind each strategy, and when it makes sense to make the leap from renting to owning a home.
Why Should I Rent?
While we all know that renting can have its challenges, this one is pretty simple. When you’re just getting started in the workforce and planning for the manual underwriting process, renting is usually your best and only option. It can be advantageous because you aren’t responsible for the maintenance expenses associated with your living space. Renters don’t have the threat of a major appliance replacement, furnace failure, or cracked foundation to deal with. What you pay for is the simplicity of having a place to call your own, without the financial risk associated with home ownership. In fact, if you think you have just enough to purchase a home, but won’t have any margin for those unexpected expenses, then you might want to hold off until your emergency fund can help you in the event of a crisis.
Because you can call your landlord when something breaks, renters have the freedom to put cash aside for their eventual home purchase. Our friends at Ramsey Solutions refer to this as a sinking fund. The idea is to set a certain percentage of your income aside each month in order to save for a large purchase such as a car, Christmas presents, or a home. All of these situations would warrant taking advantage of a high-yield savings account or even a brokerage account (possibly using the Schwab Money Market Fund), depending on your specific objectives and timeline.
Bottom Line: Renting allows you the legroom to save, save, save.
When Should I Buy a House?
You may like renting and have no aspiration to buy a home, or you may be itching to get your own space so you can put your own fingerprints on it. Whether you need convincing or your apartment is already boxed up, there is such a thing as good timing in the housing market. If you have been saving for a home purchase and you can afford to put down a minimum of 20% of the purchase price, then you might be ready to start house shopping. It’s also recommended that you secure a 15-year fixed-rate mortgage. Loans are helpful, but they aren’t meant to be a crutch. If you can pay off that house in 15 years, or less, then you will be well on your way to living a financially independent life. Owning a home means building equity. The principal payments are direct investments in your home, unlike rental payments that do little more than keep you off the streets.
Know the numbers
Right now is not the most favorable time to be securing a mortgage loan. In the current climate of rising interest rates and inflation, there have been better times to make the leap into home ownership. If you’re inclined to wait a little longer, it may be advantageous to buy at a lower interest rate a little further down the road. If you are ready to buy, make sure you can afford to pay upwards of 7% in interest on your loan. Your monthly mortgage payment will be broken down into four categories:
The recommendation is that your mortgage payment not exceed 25% of your take-home pay. Don’t just assume that because you’ve been pre-approved for a $300k loan you can afford that payment. Crunch the numbers and see if that payment falls within the 25% mark. It would be wise to pay extra toward your principal payment each month too. This will be a small price to pay which means saving thousands of dollars in interest over the course of the loan and shortening the life of the loan.
With roughly 20% of U.S. retirees still paying a mortgage payment, there are steps you can take to both own a home and be mortgage free before reaching retirement. At Whitaker-Myers, we aim to help you achieve your financial goals and to live and give like no one else in retirement. If you plan to be a homeowner and you need help putting together a plan, schedule a meeting with me today.
SHOULD I BUY OR RENT?
November 30, 2022
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