Should You Buy a House or Rent?

Owning a home has long been considered the American dream, and buying a house has typically been considered a good investment and an important milestone of adulthood. Then came 2007 and 2008 when the real estate market crashed and the Great Recession left many of us feeling jaded and nervous about getting locked into a mortgage.

Buying a home is still an important financial goal, and it can be a great way to build wealth over time. It doesn’t mean, however, that it’s always the best option.  You need to consider your unique long-term goals and your overall financial situation. Considering the following points will help you decide if it’s the right time to buy or if you should continue renting. (For more, see: 4 Overlooked Homeownership Costs.)

Are You Ready to Settle?

I often hear people say that they decided to buy a home because they were tired of throwing money out the window while paying rent. The truth is that renting provides you with flexibility and freedom that you give up once you’re locked into a 30-year or even a 15-year mortgage. Also, while rent prices may rise, rising property taxes and maintenance costs can also increase the annual costs of homeownership.

If you don’t plan on being in your home for at least three years or longer, then it usually makes sense to rent. It can take at least that long for a home to appreciate enough in value to cover the transaction costs associated with buying and selling a house. 

Do You Have Any Handyman Skills?

When you own a home, you have the freedom to make it your own. You can install hardwood floors and build a deck in the backyard. But if the hot water heater goes out during your morning shower, you won’t have a landlord to call who can deal with the repair. Depending on the age and condition of your home, dealing with maintenance and repairs can be time consuming, stressful and costly.

Will Homeownership Provide You With Tax Breaks?

It is true that owning a home can provide you with additional tax breaks that aren’t available to renters, but it is not always the case. You usually have the option to deduct the interest on your mortgage along with any property taxes that you paid, but you have to itemize these deductions to get the tax benefits. When you file your tax return, you can either decide to take a standard deduction ($12,700 for married taxpayers filing jointly and $6,350 for individual taxpayers in 2017) or you can itemize your deductions if the amount of your itemized deductions is higher.

There are homeowners who end up taking the standard deduction because even with a mortgage, they don’t have enough itemized deductions. Also, keep in mind that certain costs associated with homeownership are not deductible such as repair costs, homeowner’s insurance and homeowner association fees.  

Can You Afford a Down Payment?

You will typically receive a better interest rate on your mortgage loan when you pay a higher deposit. You should try to save up a down payment of 20% of the home’s purchase price. If you put less than 20% down, then you may have to pay private mortgage insurance because lenders will view your loan as being more risky. (For more, see: 6 Reasons to Avoid Private Mortgage Insurance.)

Also, you don’t just want to save for a down payment. You’ll likely need extra savings in place for all the additional costs that pop up that first year like extra furniture, repairs and upgrades.

How Much House Can You Afford?

This is often where people end up getting themselves in trouble. You want your total monthly housing costs (mortgage, property taxes, insurance, etc.) to be no more than 28% of your monthly gross income.  The important thing to remember is that while you want to buy a home you enjoy, you always want to have room in your budget to comfortably pay your other bills and be able to save for the future.   

Don’t Try to Time the Market

After the initial real estate market crash, home prices dropped significantly throughout most of the country. Given the low prices and the very low interest rates on mortgage loans, many people felt a sense of pressure to buy because “the time seemed right.”

The reality is that buying a home is a major decision and the best time to buy is when you’re truly ready. When you plan on staying put for a while, your finances are in good shape, you’ve saved for a down payment, and you don’t mind the maintenance work, then it probably makes sense to buy a home. Just don’t let yourself be pressured into buying because others tell you it’s a good time.  

Also, keep in mind that no one knows for certain what the future will bring for real estate prices and interest rates and trying to time the market is not a wise decision.

Owning a home can be a great way to build wealth over time and it can also provide you with financial stability. You just want to make sure that you are financially and even emotionally ready for the commitment it will involve. (For more, see: Top Tips for First-Time Home Buyers.)