“Take advantage of low mortgage rates and increase your principal!” Says your “buying” brain. “Have flexibility and keep your entry and exit costs low!” Says your “rent” side.
Ultimately, the decision depends on your financial health, how long you plan to live in the house, and how your cash flow looks.
Ask yourself these three questions to find out if leasing or buying makes more sense to you.
1. Are you financially fit?
The first step is to determine if buying is even an option.
The decision to rent or buy depends less on the price or rents of the houses and more on whether you are ready to own a home. What does your savings look like after paying a down payment? What’s your credit rating?
Andrew Dressel, a financial planner at Abundo Wealth in Minneapolis, likes that people have six months of expenses saved in an emergency fund, $ 10,000 in cash to cover closing costs and moving expenses, and a credit score. of 720 or more.
“Emergency savings are of great importance and the credit rating of 720 has more leeway,” he said.
Also, the overall cost of owning the home, including mortgage and utilities, taxes, appliance and yard maintenance, and daily wear and tear charges should not exceed 40% of salary. net of a person, he said.
“They also need to make sure that they don’t sacrifice retirement or other goals just to own a home now,” Dressel said.
Leo Marte, a certified financial planner at Abundant Advisors in Charlotte, North Carolina, said people should also work towards getting out of debt before buying a home.
“If you’re not financially prepared, paying the rent is basically buying patience and buying homeownership expense insurance,” he said.
2. How long will you live there?
If you plan to live somewhere only for two or three years, experts recommend renting. Especially now.
“If you are in a city and need to stay there, now is the perfect time to continue renting and get more for your money,” said Jay Abolofia, a certified financial planner at Lyon Financial. “People can rent in the city for a lot less because other people have fled and the landlords have had to lower their rents.”
If you’re feeling overwhelmed or rushed to buy in some fast-paced markets with low inventory, he said, renting isn’t a bad place to land, if only for a year or two. .
He dismissed the sense of urgency many potential homebuyers feel to lock in mortgage rates at current all-time highs, saying that interest rates and home prices often have an inverse relationship.
“When interest rates are lower, it puts upward pressure on house prices,” he said. “Just because interest rates are low doesn’t mean it’s a good time to buy and higher interest rates doesn’t mean it’s a bad time to buy a home.
But, said Abolofia, it’s still a good time to buy if you plan to stay there for a while.
“The longer you stay, the more it will make sense to buy,” he said.
Once you’ve figured out your estimated time in that home, check yourself in by asking if you’re being too conservative about how much home you should buy, said Leonard Steinberg, a Compass agent in New York City.
“You have to be conservative enough that you can sleep at night and eat,” Steinberg said. “But a lot of people are too conservative.”
He said he often saw people buying houses that were too small, and after a few years they realized that the space was not working for them.
“Now they have the costs of selling and buying again,” he said, which includes closing costs, inspections, appraisals, and realtor commissions. “Moving a lot is expensive.”
3. What are your monthly payments?
There is a certain amount of money that you will need to buy a home, complete the transaction, and maintain it, and it doesn’t make sense to rush home until you can comfortably cover those costs.
“If you can pay off the mortgage on a monthly basis, can maintain an adequate emergency reserve and are at the right time in life, go ahead and buy,” Noah Damsky, chartered financial analyst at Marina Wealth Advisors told Los Angeles. But, he said, do the math first.
Damsky recommends that your monthly mortgage payment not exceed 35% of your gross income. But this is the upper end. Other models are more conservative and suggest 25%, in order to keep your debt-to-income ratio lower. An intermediate recommendation says that you shouldn’t be spending more than 28% of your gross monthly income on your mortgage payment.
Also consider what you can afford to start with.
While traditionally buyers are encouraged to buy a home with a 20% down payment, Damsky said it might be advantageous to accept a higher mortgage balance with a lower down payment since mortgage rates are currently under $ 3. %.
“I encourage clients with less than 20% down payment to buy a home if they can get mortgage insurance at less than 0.2% per year and can maintain six months of emergency reserves after purchase. Said Damsky.
And while some potential buyers may look forward to the tax benefits of home ownership – including the deduction of mortgage interest, property tax payments, and other expenses from their federal tax bill – Damsky cautions not to go too far.
“I try to temper their expectations by explaining that the tax advantages will often be more than offset by an annual maintenance cost of around 1%”.
And they should be warned: The overhead costs of maintaining a home could be even higher, said Matt Hylland, a financial planner at Arnold and Mote Wealth Management in Cedar Rapids, Iowa. He advises buyers to budget for 2% to 3% of the value of the home to cover upkeep and maintenance.
“Making sure you find a monthly payment that you can afford is important,” Hylland said. “But don’t forget to add to that the other expenses you will face as a homeowner.”