Buying a home is exciting. You get all that space and something big to call your own. Ahh. Then again, renting has perks like low maintenance and flexibility to move.
It can leave you wondering, Is it better to rent or buy? The answer is, it’s up to you! Yep, that’s right—you get to decide if you should buy or rent.
We’ll teach you how to tell if you’re financially ready to buy a house or if renting is smarter, all based on your unique situation. Let’s get started!
We’re going to cover a lot of ground today, so here’s a quick list to help you start answering the question, Should I buy or rent a house?
- Whether you should buy or rent depends on your financial situation—nothing else.
- You’re ready to buy if you’re debt-free, have a full emergency fund and enough cash for a down payment, plan to stay put for several years, and know your mortgage (including taxes and insurance) won’t cost more than 25% of your take-home pay.
- It’s smarter to rent while you pay off debt, move around for work, or make a plan about where you want to settle down.
- There are good and bad to buying and renting. Buying a house gives you ownership, privacy, and freedom, but it comes with a lot more work and costs. Renting is lower maintenance and more flexible, but you may have to deal with crazy neighbors and rising rates.
- Buying a house isn’t always the most grown-up thing to do. And renting isn’t a waste of money. It’s all about taking control of your finances and making smart choices!
Okay, now that that’s out of the way, let’s dive into the details!
Should I Rent or Buy a House?
Owning a home is the American Dream. There’s no doubt that having your own house comes with a lot of satisfaction and pride . . . but it also comes with extra costs, maintenance and stress. That’s why you want to be absolutely sure you’re ready to buy a house.
Five Signs You’re Ready to Buy
If you can answer yes to all the following questions, you’re prepared to take the plunge. (If you answer no to any of them, you can skip ahead to the next section on renting.)
1. Are you out of debt?
We’re talking no consumer debt at all. No student loans, no car loans, no medical bills, no credit card payments, no personal loans—nothing! Houses are expensive, and they come with a lot of unexpected costs. So you want to get rid of those monthly payments and free up your income to make sure you can afford your dream home.
READ MORE: Checkout Financial Tips After Buying Your First Home
2. Do you have a full emergency fund saved?
If you got laid off today, could you pay your monthly expenses (like your mortgage, utility bill, and grocery costs) for three to six months while you look for work?
3. Do you have enough cash for a 10–20% down payment on a 15-year fixed-rate mortgage?
Having 20% or more means you don’t pay that pesky PMI (private mortgage insurance), which basically protects your lender if you stop making payments. To make sure you get a home loan you can pay off fast, talk to our friends at Churchill Mortgage.
4. Will your house pay by 25% or less of your monthly take-home pay?
Making sure your mortgage payment (including principal, interest, property taxes, homeowners insurance, PMI, and homeowners association fees) is no more than a fourth of your monthly income leaves plenty of room in your budget to achieve other goals, like saving for retirement and putting money aside for your kids’ college funds.
5. Do you plan to stay in the same location for more than three years?
If you’re not crazy about where you live, why would you buy a house there? And in the same vein, it doesn’t make sense to buy a house if you know you’re going to relocate for work or family reasons in the next year or two. Make sure you’re really ready to put down roots before you buy.
If you answered no to any of these questions, now isn’t the right time for you to buy a house. Put your home purchase on hold and focus on your finances until you can answer yes to all of them.
Two Reasons You Shouldn’t Buy a House
We talk to a lot of home buyers, and unfortunately, many of them regret their purchases because they bought for the wrong reason. We hear the same two excuses for buying a home all the time—and we don’t want you to fall into the same trap as those people did! This is what they say:
1. It’s a “great” deal.
You found the perfect house, and the sellers are practically giving it away. It just might be the deal of the century. Even though Sallie Mae’s still clutching your pocketbook, you’d be dumb to walk away—right?
Wrong! With real estate, you’re way better off buying the right home at the right time—not buying a house based solely on the market. When you do that, you run the risk of getting in over your head with a house you can’t truly afford.
Have some patience. And remember, good deals are like buses: Another one will come along soon.
2. You feel pressured.
Many home buyers in their 20s and 30s feel a ton of pressure to buy a house because they think it’s the “grown-up” thing to do. The truth is, taking control of your money is the most grown-up thing you can do.
So if you’re 25 and feel like you’re behind the curve because you haven’t bought a house yet, relax. Don’t rush into a big purchase just because your broke friends (or broke family) keep telling you that you should. Real grown-ups know homeownership isn’t the money-smart choice in every situation.
It’s way smarter to wait to buy when you’re financially ready. And trust us, no one has ever regretted waiting until they were ready for anything—especially a house.
Three Times When You Should Rent
Real quick, let’s get something straight. There’s a myth that when you rent, you’re just flushing your money down the toilet. And that’s wrong! Renting is not a waste of money. Sure, you’re giving your money to the landlord. But you’re paying to live somewhere! And as long as you’re paying to live, your money is well spent.
While we don’t recommend renting as a permanent way of life, there are a few times when it’s better to rent than buy.
READ MORE: Everything You Need To Know About Buying A Fixer-Upper
1. You’re paying off debt.
If you have student loans, credit card bills, or any other debt to stomp out, consider your apartment your stomping ground. You can hang out here with your cheap renter’s insurance, letting the landlord pay for all the maintenance, while you knock out that debt.
(Unless your rent is devouring too much of your paycheck. In that case, you should find a cheaper apartment where you have a better opportunity to get out of debt and save.)
2. Your job requires you to move around.
If you’re in the military or you don’t plan to stay long in an area, it’s smarter to rent. In most areas, you’ll need to stay in a house for two to three years to make buying worth the up-front costs.
3. You need time to make a plan.
Buying a house is a long-term commitment. As with any relationship, acting impulsively is never a smart move. So, if you just got married, graduated from college, or aren’t sure which neighborhood you want to live in, the smartest thing you can do is rent for a while. We recommend waiting at least a year—that gives you time to decide how close you want to be to the in-laws.
Is Renting Always Cheaper?
Renting is cheaper in the short term. If you look at monthly costs alone, you’ll see that homeownership often tips the money scale to the pricey side, since you pay for maintenance, taxes, and homeowners insurance on top of your mortgage.
Renting is also probably cheaper if you’re moving every few years or you’re in a super-expensive housing market (like San Francisco).
But there’s a tipping point: If you rent for decades, you could actually end up paying more than if you’d just bought a house. That’s because a house payment will stay the same while rents go up (unless you have an adjustable-rate mortgage, in which case your mortgage goes up too). So if you’re going to stay put for the long haul, it’s better to buy—especially when you pay off your home.
Pros and Cons of Buying and Renting
Okay, now you know whether it’s better to rent or buy in your situation. But before you rush out to sign any paperwork, you need to know the pros and cons of buying and renting.
Now, these pros and cons don’t change the answer to the question, Should I buy or rent? They just help you prepare for the right type of housing. Because let’s face it: Even if you’re financially ready to buy a home, you may not be thinking about repairs down the road. And that trendy apartment you love might come with some noisy neighbors.
So, let’s see what’s great (and not so great) about buying and renting.
- You can actually own the house. When you pay rent, that money is spent. Gone. Bye. But when you pay your mortgage, you work toward full ownership. And once it’s paid off, it’s yours! You have the satisfaction of knowing you made the American Dream your reality.
- You can cash in on appreciation. Your home will most likely increase in value over time depending on the market and how well you take care of it. What you buy for $200,000 today could sell for $260,000 down the road.
- You have tax advantages. Many costs of owning a home—like property taxes—are tax-deductible. And if you’re paying off a mortgage, you have the option to deduct your mortgage interest when you file your tax return.
- You have the freedom to renovate your house. As a homeowner, you can do whatever you’d like to your home. If you want to paint it hot pink from top to bottom, no landlord can stop you—although your spouse might have something to say about it.
- You have more privacy. Ricky and Lucy are fighting again—and because the apartment drywall is as thin as a playing card, every tenant can hear them. But having your own house means no Ricky, no Lucy, and no cramped apartment. Just you and peaceful silence. Of course, if your dream home is a beautiful condo in the middle of bright lights and city life, this wouldn’t apply.
- It’s more difficult to travel and relocate. Want to go to Southeast Asia for six months on a whim? Leaving your house isn’t as easy as getting out of a lease, packing your backpack, and getting a one-way ticket to who-knows-where. The same goes for work-related relocations. You’ll have to rent out or sell your house—or else prep it to stay vacant for a long time.
- You have more expenses. Remember how little renters insurance costs you? We hate to break it to you, but homeowners insurance will be a lot more. Combine that with a possible flood policy, HOA fees, property taxes, and higher utility bills, and you’re looking at more monthly expenses.
- Who’s going to fix the leaky pipe? You are. Or a plumber you pay. As a homeowner, you’re responsible for maintaining your home.
- You can move with ease. Tired of the city you’re living in? Thinking about taking a year to travel the world? When you rent, you don’t have to stay in the same location. Plus, it’s much easier to get out of a lease than a mortgage.
- You don’t have to pay for maintenance. If the stove goes kaput and the faucet pipes burst, you don’t have to call the plumber or make a trip to the appliance store. You call the landlord. One of the biggest perks of renting is that you never have to worry about surprise repair costs. And if you have renters insurance, you’ll have even more peace of mind.
- It’s cheaper in the short term. Besides having virtually no maintenance costs in an apartment, renters insurance is way cheaper than insuring a home. Your move-in costs will also be lower since you just have to come up with a small security deposit instead of a giant down payment. Plus, once you’re in, you won’t have to pay any stupid HOA fees or PMI.
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- Rent rates will go up. Even if you found a killer deal in a hot area, inflation, competition, and rising property values will cause your rent to go up year after year.
- You have no financial incentives. No tax deductions. No equity. No rising property value. So even though you’re spending your rent money on an important living expense, it can still feel like you’re not making any progress.
- You have less freedom to renovate. Even though you think hardwood floors would look great in the bathroom, your landlord may not approve, especially since they’ll be the ones to pay for any renovations. You have little say in what your place looks like.
There you have it! Whether you’re ready to buy or you want to keep renting, now you’ve got a better idea of what you’re getting yourself into.
Buy or Rent? Make Your Best Choice With a Pro.
Deciding whether or not to buy a house isn’t an easy choice. That’s why it’s smart to partner with a pro who can help you navigate your options.
If you’re looking for a local real estate agent who will offer you trustworthy advice no matter your budget, give our real estate Endorsed Local Providers (ELPs) a try. Our RamseyTrusted ELPs understand the financial path you’re on and won’t push you to overspend on a house just so they can bring home a bigger commission check. They’ll even help you look for a great apartment if that’s what you need.
We only endorse the top agents in your area, so you can trust your ELP to negotiate the best deal on the house that’s right for you.Click Here To Comment!