Dollars & Sense: Buy a Home or Just Keep Renting?
Homeownership has always been part of the “American Dream.” Conventional wisdom used to be that you grow up, settle down, and buy a house—because it’s a great long-term investment. The recent housing crisis and the corresponding recession made that dream a nightmare for many. The fallacy that homeownership equates to financial stability no longer exists. Today, homeownership is a personal decision that is heavily dependent on the prospective buyer’s specific set of circumstances. Here are factors to consider when deciding whether to purchase a home or continuing to rent.
Be Emotionally Prepared to Buy a HomePurchasing a home is likely the largest purchase a person will make in their lifetime, and can be an emotional process. That said, prospective homebuyers should not allow their feelings or emotions to cloud sound judgment. If you are going to buy a home, set a budget and stay in it, despite what your realtor may suggest. In real estate, “love at first sight” is an expensive proposition. If you are not emotionally prepared to walk away from your “dream home,” you might want to continue renting.
CreditworthinessA prospective homebuyer’s credit score is one of the biggest criteria considered by lenders in the mortgage application process. The term “credit score” most commonly refers to a FICO score, a number between 300 and 850 that represents a person’s creditworthiness — the likelihood that, if given a loan, that person will be able to pay it off. Lenders typically require a minimum credit score of 620, but for the lowest mortgage rates, you need a credit score of 740 or above. If you do not qualify for the lowest mortgage rates, you should continue renting while you improve your credit score. Buying a house with a higher mortgage rate can cost you tens of thousands of dollars in the end.
What Can You Afford?Most advisors agree that a mortgage payment, or even rent for that matter, should not be more than twenty-five to thirty percent of your gross monthly income. The cost of purchasing a home is much more than just the price tag on the home. Housing costs include mortgage payments, private mortgage insurance, property taxes, homeowners’ insurance premium, homeowner’s association (HOA) fees, utilities (including: electricity, water, trash collection, gas, cable, internet, etc.), crime prevention, cleaning, repairs/maintenance, decorating, landscaping, and home improvements. A prospective homebuyer must consider and budget for these other home-related expenses before making the decision to purchase a home.
The Benefits of RentingBuying a home is a long-term, expensive decision. In many cases, renting is not only the cheaper option, but the better option. If you travel or relocate often, having a lease does not lock you into a long-term investment in a specific location. Additionally, with renting there are little to no repair or maintenance costs, and you have access to amenities such as a gym or a swimming pool in an apartment complex, without additional costs.
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