- Only buy a home if you can afford it and you plan to stay for at least five years.
- Emergency savings should be three to six months’ worth of expenses in a high-yield savings account.
- A down payment of 20% is ideal, and a lower debt-to-income ratio and higher credit score improve the chances of approval for a lower-interest rate.
What’s the deal, then? Is it worth plunking your savings on a piece of real estate? Or better to keep renting for a period of time— perhaps until the end of time? We do have an answer.
You have always been convinced that the greatest accomplishment is buying a house — the American Dream, brick-and-shingles, fenced-in-backyard embodiment. But only about one-third (37 %) of millennials between the ages of 25 and 34 own homes. And of those who do, 63% actually regret their home purchase, with the top explanation being a quarter citing “unforeseen repairs or hidden costs.” In fact, renting is cheaper than buying in more than half (59 %) of U.S. housing markets.
What’s the deal, then? Is it worth plunking your savings on a piece of real estate? Or better to rent for a period of time or until the end of time? The brief truth: If you can afford the down payment on a home that is likely to appreciate, and you intend to stay on the property for at least five years, you can go for it. The long answer to that is all below.
1. Do you need to rent a house or buy one? Let’s run the numbers.
Of course, the most critical first step in the rent / buy decision is to decide whether you can afford to purchase a home, and if so, whether you can afford as much of a home as you like. Before you go any further, look at the numbers below:
2. Think about your 5-year plan (or, you know, think about making one).
Let’s presume that all your number add up, and you’re in great financial shape to buy a house. Congratulations. So now is the time to ask yourself: “Where do I want to be five years from now?” When the answer has a definite geographical position attached to it, it is a good choice to buy a home. But if you’re not quite sure where you’re going to live in the next couple of years, you may want to consider renting before you figure that out. Renting not only gives you more freedom to lock up where you want to be, but it’s usually cheaper in the short term too.
You should only purchase a house if you intend at least five years in it. This will allow you ample time to recoup the costs of buying and selling, such as legal and bank charges, fees, and inspections. For example, if your home appreciates 2% a year, it will appreciate 10% in five years. Selling it would cost you 6% of the value of your home because of the brokers ‘fees. You must also pay the closing costs in advance and a 1% annual maintenance fee. That’s why it’s so crucial to look for a home that’s likely to appreciate — our free planning feature can be extremely helpful in scanning this out before you buy a house by showing you patterns and projections based on multi-source data — and not selling it for at least 5 years.
The sum charged to the principal begins surprisingly minuscule because of the way mortgages are amortized and rises gradually over time. Say you’re taking out a $300,000, 30-year fixed mortgage at an interest rate of 4.5%. When you make your first $1,520 payment, there will be a whopping $1,125 of your payout going to interest, and a mere $395 to pay down your principal. (The word you’re looking for here is “oof.”) It would take about 15 years for your payments to become more of an interest than a principal one.
Although you’ve already heard of homeownership’s tax advantages, recent changes in tax laws have made renting more attractive to many Americans. While you can subtract the interest charged (up to $750,000 on mortgages), you’ll need to itemize — which has become less popular as the standard deduction has risen to $12,000 for single and $24,000 for joint married filers. The number of state and local taxes you can deduct (SALT) is now also capped at $10,000.
3. Renting vs. buying doesn’t have just one clear answer.
Let’s get one thing out of the way: A home isn’t always “good investment,” and renting isn’t always “wasting away money.” At least, when you pay rent, you get shelter in exchange, which isn’t nothing. If you pay rent, then cheers! You have a place to stay, so this puts you in a stronger spot than others, and it’s not a bad thing to centralize in the argument over “renting vs. buying “— you’ve got shelter, and every additional benefit you may gain from your housing circumstance is gravy.
In addition to getting a real roof over your head, renting a home could be what helps you to save money on a potential home purchase downpayment, or start a business. It might allow you to live close to a job in a city where you can’t afford to buy a home right now (or ever). When you can unhook yourself (and you really need to) from the housing system that makes us assume that renting is essentially inferior to owning in all situations, you would be less likely to have an emotional understanding of owning a home and open up to the idea that renting may be more beneficial to your goals and circumstances.
The long-term returns of owning a home aren’t so clear-cut either. According to Nobel Prize-winning economist Robert Shiller, between 1890 and 1990 the return on investment on homes has hovered around — wait for it — 0%. On the other hand, the S&P 500 averaged annual returns of approximately 10% between 1926 and 2018.
That may be why Florida Atlantic University scholars suggests renting is always a better financial choice than buying. Their work indicates that continuing to rent, and spending the cash you would otherwise put into a house (for a down payment, renovations, taxes, etc.), could potentially generate more wealth than purchasing.
The catch: You must be extremely diligent to simply invest the extra money and not waste it on, say, a new Tesla or take-out sushi worth a lot. We don’t mean you can’t buy a car or order takeout, only that you have to agree on a budget and create financial plans that include spending on the regular — and you have to stick to that. If that seems daunting then throwing your cash into property might be a good way of locking up your assets for your future self so that your present self can’t go too wild.
4. Scope your location
No discussion between renting and purchasing a home without a close look at the specific housing market. Think about the type of home you want — size, amenities, design, etc .— and then research the hell out of renting and buying prices in your region. Warning: during this part of the cycle you can become addicted to Zillow but honestly there are worse things.)
When you have those numbers in hand, plug them into one of the many online calculators for “renting vs. buying” built to help you make this decision. If you are more of a DIY guy, measure the price-to-rent ratio by dividing the dividing your city’s median home price by its median annual rent. Generally speaking, the lower the ratio, the smarter it is to buy; the higher, the better you’re likely to be renting out.
While it may be tempting, making an apples-to-apples comparison of your hypothetical monthly mortgage payment and actual monthly rent is inaccurate. Homeownership comes with an unavoidable slow drip (or, depending on your luck, crushing deluge) of extra costs including maintenance, taxes and insurance. Experts advocate budgeting 1% of the home’s purchase price annually for maintenance and repairs alone. That’s why we suggest using the calculators, at least to give you an idea of what makes sense to you.
Finally, you should research trends and forecasts about real estate in your area. When you live in a place where house prices are rising more quickly than inflation, if you want to buy, you might come out ahead. Conversely, if there’s so little appreciation, you will be better off renting.
5. Uh oh, time to think about your life.
If you’ve crunched all the numbers, done all the analysis, and still, you don’t get a straightforward answer, we’re saying two things do. Next, carry on renting now. Although not all signs point to “buy a home now — it is definitely a very good decision! “As you collect confidence (and save more cash for your down payment) for a potential future home purchase, you might just as well cool it in your rental. So spend some time immersing yourself in the fuzzier aspects of your life and future, from the comfort of your rented home; the countless intangible things that will affect your decision.
6. How badly do you want it?
This, too, matters. If the cold numbers always leave you a little on the fence when it comes down to it, but emotionally you are genuinely in love with the thought of finally owning a home that is truly yours, then go with that. Let your logic pave a path for your emotional fulfilment when it comes to buying a home. A home isn’t just something that you own — it’s a place where you live for the rest of your life. Weighing your emotions as strongly as you wish is more appropriate.