Steady job. Marriage. Home ownership. Family. For generations, that was the path toward the American Dream … until the Great Recession.
The country is still recovering from high unemployment. The marriage rate and birth rate have fallen. And homeownership remains an unreachable goal for many Americans. At 63.5 percent, it nearly matches the 48-year low of 63.4 percent from spring 2015.
While recent upswings in housing and employment numbers give some hope, the Great Recession has forced many Americans to redefine what the American Dream means to them. And, as they consider their housing arrangements, people often are deciding if it is better to rent vs. own. Many are deciding to sign rental agreements instead of mortgage contracts.
What’s right for your family? Here are some questions to ask yourself:
To make an informed decision, you can’t just compare the monthly rent and the monthly mortgage payment for the homes and apartments you’re considering. It’s more complicated than that.
Renters must pay for renters insurance and a security deposit. Homeowners must cover the down payment, interest, property taxes, closing costs and more. Add to that equation the benefits of ownership, which can include tax savings and appreciation of the property, for instance.
CESI’s Rent vs. Buy Calculator makes crunching those numbers easy.
Have you been watching too many home improvement shows that feature massive kitchens and spa-like master baths? It’s OK to dream, but switch off the TV and look at your own reality.
Generally, a home that fits into your budget is about two and a half times your annual income. Using that general rule, if you earn $40,000 a year, for instance, you could afford a $100,000 home. Does that price point allow you to buy the kind of home in the neighborhood and school district that’s best for your family? If not, it might be best to rent and look for ways to boost your income and savings rate.
How long do you plan to stay in the city or town where you’re living? Will your job or family situation force you to move in the next year or two? Then, it might make sense to save on those upfront costs of homeownership such as the down payment and closing costs and rent instead.
Even if you’ve been approved for a $300,000 loan, that doesn’t mean you’re ready to buy a house. Take a good look at your own finances.
Is your income reliable? What’s your credit score? Can you manage your other debts along with the mortgage payments? Will you have money to replace a leaky roof? CESI University’s housing guide offers more questions to ask yourself to determine if you’re really ready to buy.
If renting is cheaper, what would you do with the money that you save? Would you pay off debt? Would you save for retirement? Or, would you fill your apartment with new gadgets and eat every other dinner out?
If you can handle your finances responsibly, it could make more sense to use that money to buy a home, which would allow you to build equity and benefit from tax advantages. Paying off your mortgage each month also allows you to build more cash value in your home. Years from now, as you plan for retirement, you could sell your home, downsize to a less expensive one and use the profit for living expenses.
A home is the biggest purchase most of us make in our lifetimes. Asking the right questions and preparing yourself for what’s to come is the best way to ensure you’re making the right decision for you.
Image attribution: By Nyttend (Own work) [Public domain], via Wikimedia Commons
Filed Under: Housing
Consumer Education Services, Inc. (CESI) is a non-profit service provider of comprehensive personal financial education and solutions for all life stages and for all of life’s milestones. Our goal is enhanced economic security for everyone we serve.
CESI is NOT A LOAN COMPANY