The decision to become a homeowner is not one to take lightly. It can be both exciting and burdensome and is a personal decision as much as a financial decision. Buying a home is likely one of the most significant purchases you will make, so the question then becomes, When should you buy and when should you rent?
Whether to rent or buy a home comes down to answering some of these questions:
- Do you have enough saved to pay for a 10 to 20 percent down payment?
- Do you have an emergency fund set aside?
- How long do you intend to stay in this location?
Aside from funding considerations, the general rule of thumb is to consider your 5-year plan. If you plan to move within five years, renting is most likely the better option. Buying makes sense if you plan to live in the same area for more than five years.
Renting a home gives you the flexibility to pack up and go when the lease is up without worrying about maintenance, repairs, or other homeowner responsibilities. However, owning a home can bring a sense of stability and happiness of ownership, along with tax benefits and equity.
When you buy a home, you typically do not pay the full price of the home upfront. The home’s cost is divided into a down payment — which you pay upfront when you purchase — and a mortgage — which is a debt that you generally pay off over 30 years. Down payments are typically 10 to 20 percent of the home price. Keep in mind that if you make a down payment below 20 percent, it will most likely require you to have monthly home mortgage insurance. Depending on your mortgage’s value, the additional insurance cost may be approximately $300 more per month, which is on top of your mortgage payment.
Purchasing a home comes with upfront costs and fees that are best recouped as time goes by — the longer you own the home, the better. You will want to consider factors such as home prices in your area, closing costs, and the mortgage rate that you can receive. Additionally, if you are purchasing, you want to make sure that you have emergency savings set aside if your home needs any repairs.
Since there is no “easy” answer to whether you should rent or buy, it is important to sit down and evaluate both pros and cons and make the decision based on your personal and financial situation.
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