Rent or buy? Maybe you're asking yourself that very question right now. The U.S. homeownership rate stood at 64.8 percent for the 4th quarter of 2018, according to U.S. Census Bureau data—continuing an upward trend from August 2016, when the rate matched an all-time low first reached in 1965. As more Americans become homeowners, should you join the ranks?
Buying a home can be alluring. When you buy a property, you purchase an asset that you hope will appreciate over time. And you usually have the freedom to renovate or expand as you see fit. For prospective homebuyers, renting can feel like you are "throwing money down the drain" each month—it's gone and isn't coming back.
But renting can have its own appeal. It offers flexibility and mobility. It's easier to pick up and go somewhere else because you don't have to sell your property or rent it out. It's also easier to budget when you rent. There's no risk of a large, unexpected home repair bill. And as the 2008 housing crisis showed, there's no guarantee home values will rise.
Since a home purchase is often the single biggest investment many people will ever make, it's important to give the question—buy or rent—serious consideration. If you are wondering what is right for you, here are four questions to ask yourself:
1. Do I Have a Handle on the True Cost of Homeownership?
Your monthly mortgage bill is just the beginning of what you pay as a homeowner. Up front, you'll need enough money to cover a down payment, which could range from 3 percent of the purchase price to 20 percent or higher. And if you put down less than 20 percent, you will likely be required to obtain private mortgage insurance (PMI), which acts to protect the lender if you are unable to pay your mortgage. PMI can cost upwards of $80 a month for every $100,000 borrowed, according to Freddie Mac.
You'll also have closing costs, such as appraisal fees and lender origination fees, which can add up to 2 percent to 5 percent of your purchase price.
Then there are your ongoing payments, including recurring bills, such as homeowners insurance, real estate taxes and homeowner association fees. On top of that, there are the unpredictable costs, like a leaky roof that needs to be replaced. Some experts recommend budgeting at least 2 percent of your home's value each year for repairs.
It's important to sit down and calculate your after-tax income and compare that to your expected home costs (the CFPB has a helpful worksheet). Keep in mind, there may be some tax advantages to owning your home that should be factored into your calculations.
2. Do I Plan to Live in The House for the Long Haul?
As a general rule, it doesn't make sense to buy a home unless you expect to live there for a while. The reason: You want to give your property enough time to appreciate in value to compensate for the costs you've incurred as a homeowner. For some, that might be five years (a good ballpark estimate for how long to stay put). But some homeowners who bought at the peak of the market more than a decade ago are only now seeing their home's value recover.
3. Would It Make Sense to Invest My Money Elsewhere?
Once you commit your money to a down payment, it's now tied up and no longer available to be invested elsewhere. The same holds true for the money you set aside for repairs and recurring home expenses.
Owning a home can have many benefits beyond potential price appreciation (you get to live in it, for instance) and performance comparisons won't be apples to apples. Still, it's worth having a general picture of how this money might fare if it were put into other asset classes such as stocks or bonds.
4. Am I Ready to Take on the Responsibilities of Home Ownership?
It's easy to get caught up with the idea of being a homeowner and to forget about the effort involved. When something breaks, you either have to fix it yourself or track down someone else and pay them to do it for you.
If you grow disillusioned with your home, you can't necessarily count on making a quick sale. All those advantages of homeownership can easily disappear if you're stuck with a home you don't want, and the financial aspects that come with it.
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