It’s a question that many Americans ask themselves: Should I buy a house or rent one? It’s both a lifestyle decision and a financial matter. There are reasonable arguments for either approach, so you’ll want to weigh both aspects of the puzzle carefully to reach a solution that’s right for you.
Should I Buy a House or Rent One?
According to Pew Research, some 75 million households owned their home in 2016. Meanwhile, 43.3 million households rented their home. Among renters who were surveyed, 72 percent said that they’d like to buy eventually; only 32 percent said that renting was a matter of choice.
Should I buy a house or rent one? Clearly, if you’re asking that question, you’re not alone. To find the answer, you’ll need to think about your lifestyle and your finances.
The Lifestyle Angle
Owning a home is a responsibility. As Investopedia points out, renters can live practically anywhere, and they have the freedom to move without penalty as soon as their lease is up. They also don’t have to worry about surprise repair bills, property taxes, or depreciation. In short, renters can relocate more easily, and they generally have less of their income tied up in their housing. In addition, homeowners often have to spend a fair amount of time and effort maintaining and caring for their property. Since renters aren’t weighed down with the same responsibilities, they have more free time to devote to other interests.
According to Money Under 30, if you aren’t truly interested in the responsibility of being a homeowner and you’re certain that you’ll stay in the home for at least five years, then you’re probably better off renting for now. Why five years? That’s a financial matter.
The Financial Question
You like the idea of being a homeowner, but can you afford it? The only way to find out if you can afford the kind of home that you’re dreaming of is to take a hard look at your finances. WealthFront suggests evaluating the following carefully:
- Your Credit Score: A strong credit score is a huge asset when you’re shopping for a mortgage. A score that’s just a few points higher can win you offers of the best interest rates and may even save you thousands over the life of your loan. Before approaching a lender, it’s smart to check your score and verify that it’s accurate. Is it lower than you’d like? Taking a little time to raise it may be a worthwhile endeavor.
- Your Debt-to-Income (DTI) Ratio: There are two DTIs to calculate. Your front-end DTI equals your monthly housing expenses, or your mortgage, taxes, and insurance, divided by your monthly gross income. Your back-end DTI is the total of all your monthly expenses divided by your monthly gross income. Lenders generally prefer a front-end DTI of less than 28 percent and a back-end DTI of 33 percent. If yours are higher, then you may need to trim your finances before you consider making the leap from renting to buying.
- Your Down Payment: Loans are available that require a three percent down payment. In some cases, you may even be able to qualify for 100-percent financing. However, the more you borrow, the more you’ll have to pay back. Having a respectable down payment may also help you secure favorable loan terms and start your time as a homeowner with more equity.
- Your Savings: Having savings set aside for an emergency is good for your peace of mind and your financial health. Having a financial reserve also demonstrates your fiscal responsibility and ensures that you’re ready for closing costs.
- Your Five-Year Plan: Are you planning to stay put for at least the next five years? If you have reason to believe that you might want or need to move for work or pleasure during that period, buying a house probably isn’t a good idea. That’s because there are costs involved in buying and selling a home, and it generally takes at least five years to recoup them.
Why choose PrimeLending Dallas? Whether you’re ready to purchase a home, searching for a renovation loan, or interested in refinancing, we make the home loan process simple. Reach out today.