Real estate is a hot topic these days. And it’s no wonder! Markets across the country are on fire! Most people realize the true value of homeownership. Furthermore, many are asking whether or not now is the time to buy! Not to mention, mortgage interest rates are the lowest they’ve ever been. So, is it time to ditch the apartments and buy a house? Buying versus renting: which one is best?
Before we answer that question, you’ll need to ask a few others first. Additionally, there are some pitfalls you need to avoid. Here’s what you’ll find in this guide:
- How to avoid house fever
- How to know when you should rent
- The advantages and disadvantages of renting
- How to know when you’re ready to buy a house
- The advantages and disadvantages of buying a house
- Evaluating your situation to decide which is best
Of course, buying a house is not a small purchase. One misstep can cost you dollars with lots of zeros on the end. Therefore, be wise as you weigh the pros and cons of buying versus renting.
Avoiding House Fever
Before we look at buying versus renting, it’s important to make sure you have the right mindset. After all, the last thing you want is to make a purchase you’ll later regret. So let’s talk about some of the pitfalls as you evaluate whether you should buy or rent.
You’ll find people all over the place who have a disease known as house fever. And no, it’s not an actual illness. However, it does have some very powerful symptoms. My basic definition of house fever is the irresistible urge to purchase a house, no matter the consequences. As you can imagine, this can lead to a lot of impulse buying. And the last thing you want to impulse buy is a house.
So, how do you identify whether or not you have house fever? Below is a list of the symptoms. You’ll find that many of them are either emotion-driven or driven by false perception. But trust me, you really don’t want to buy a home based solely on one of the reasons below.
Symptom 1: I’m tired of my money going towards nothing
First, many people notice that real estate has tremendous value. When you have a house, you have the opportunity to build equity into it. On the other hand, if you rent your money only goes into your landlord’s pocket. The logical conclusion is that you need to buy a house as soon as possible, regardless of the circumstances.
However, it’s a bit of a stretch to say your money goes towards nothing while renting. In reality, your rent goes towards ensuring a roof stays over your head! Truthfully, purchasing a home as soon as you’re financially ready is a good thing. However, as the old saying goes, “the right thing at the wrong time is the wrong thing.” Instead, see renting as a time to build up some cash so you can buy your house at the right time.
Symptom 2: My noisy neighbors drive me crazy!
Linda and Stu are arguing at four in the morning. Again. Furthermore, you hear the pitter-patter of little feet. But they’re on the floor above you. Moe and Drew have their stereo at full blast on the other side of your wall. Okay, okay, I get it. Apartment living comes with some loud people who have no regard for others. It’s a natural desire to get out of there as soon as possible.
But again, this shouldn’t be your sole reason for something as big as buying a house. You’ll still find your share of crazy once you move into a neighborhood. Even as I write this, I’m living next door to crazy neighbors. They honk their horns, throw parties, and generally drive me nuts. Did you think buying a house would help you escape this? Think again!
Symptom 3: The market is perfect right now! I might miss my chance if I don’t buy!
Many people try to play the market. The funny thing is it doesn’t matter if it’s a buyer’s market or a seller’s market. During a buyer’s market, people rush to buy houses because of low prices. When it’s a seller’s market, people make quick decisions because of the heavy competition. Either way, many believe they will miss their opportunity to buy if they don’t hurry.
However, you can buy a house in almost any market condition. There is never a time you need to rush into buying something that costs $200,000. And it doesn’t matter if you found a great deal on a real estate website! Trust me, there will be another one eventually! Have some patience and purchase only when you’re ready.
Symptom 4: Mortgage Interest Rates are Super Low Right Now!
Currently, mortgage rates are the lowest they’ve ever been. Heck, even I’m refinancing right now! With interest rates so low, why not rush into the housing market? After all, these rates won’t last forever!
But slow down. You don’t need to rush into buying a house just because mortgage rates are low. Besides, having low interest rates won’t help you unless you’re financially prepared to buy. Mortgage interest rates shouldn’t dictate your purchasing decisions. Your situation should.
Symptom 5: I want to be able to do what I want with my home NOW!!!
I totally understand this one. You hate the shaggy green carpet, the purple walls, and the pink toilet. However, you can’t do anything about it because you’re a renter. You start thinking of how nice it is for homeowners to do whatever they want with their houses. Also, it doesn’t help that you watch Fixer Upper every night.
But hold your horses! Now, I will say this is a pretty good reason to want a house. However, it’s not a reason to sprint towards home ownership if you’re not ready. Have some patience, young grasshopper! Your time will come!
Symptom 6: Having a mortgage is cheaper than renting!
One night, you really start to get the real estate itch. But you begin to wonder if it’s in your reach. So you start some number crunching. You find an online mortgage calculator and your jaw drops in amazement! Your rent is $850 a month, but you can get a mortgage for just $725! Now you start to fantasize about what you could do with that extra $125. Time to get the Realtor on the phone!
But not so fast. A lot of those online mortgage calculators only tell you the payments for principal and interest. They don’t take into account the insurance and property taxes. Not to mention, you’re responsible for EVERYTHING in your home. In other words, you foot the bill if something breaks. Also, you have yard care, higher utilities, and possibly homeowners association fees. Not so cheap now, is it?
Symptom 7: It’s what’s expected of me
This one goes right along with, “when are you going to have kids?!” Many feel pressured by family and friends to purchase a home. After all, everyone else is doing it. Why not you? It’s a good investment, right?
Hold off for a moment. Are you really going to let someone else pressure you into spending $200,000?! Hopefully, your answer is no! Don’t let peer pressure dictate what you do with your life. If you just wait until you’re fully ready to buy a house, you’ll enjoy the full benefits of being a homeowner!
When to Rent Instead of Buy
Okay, now that we’ve got you in the right mindset, let’s take a look at buying versus renting. First, we’ll discuss renting. Believe it or not, there are some pretty good advantages to continue renting in certain situations. Sure, you may not want to do it forever. But it can give you time to put yourself in a good financial situation.
Of course, there are some disadvantages as well. We’ve already noted some of them when we talked about house fever. But as I said earlier, it’s important to move beyond emotional and impulse buying. Instead, you need to look at your situation as a whole.
When Should I Rent?
First, let’s discuss when you should continue renting. Okay, I know you hear those low interest rates whispering in your ear. However, you need to listen to the logical side of your brain.
You should continue renting if you have a lot of debt
So, you have a $10,000 car loan, $12,000 in credit card debt, and $40,000 in student loans. Are you sure you want to take on another $180,000? Having a lot of debt can make buying a house very risky, even if you have a decent starting salary. Remember, debt equals risk!
When you’re in debt, a lot of your money goes towards those payments. While your expenses are lower, consider using your time as a tenant to attack that debt and kill it! Just imagine how it would feel to have no other payments but your house payment. I think that sounds pretty good! Don’t you? Besides, if you can barely make your current debt payments alongside your rent, what makes you think you can add a house to the mix?
You should continue renting if you move around a lot
This one is especially true of military folks. If your job requires you to move a lot, it’s better to keep on renting. Why? Because you’ll never be in a place long enough to build up equity. In other words, you’ll lose money as you continuously buy houses.
You should continue renting if you need time to make a wise decision
Let’s say you just got a job in a new, unfamiliar city. You don’t know anyone, you don’t know the city, and you don’t know the housing market. Do you think the best idea is to blindly pick a neighborhood and assume you’re making a good buy? If you do that, you might end up next to the city dump. Why? Because you don’t know anything about your new home!
Why not take some time to learn the area? Renting for just six months can give you a good feel for your new home. It will also keep you from making rash decisions. Also, once you become more familiar with the area, make sure you work with a top-notch real estate agent!
Advantages and Disadvantages to Renting
As with anything, renting has its pros and cons. Knowing the advantages and disadvantages can continue to help you make a wise decision. Let’s take a look at these.
- Moving around is easier – It’s a lot easier to pick up and go when you rent. All you have to do is wait for the lease to be up and you have no obligation to stay!
- Maintenance is usually provided – Normally, when the toilet backs up, it’s not on you to fix it. Just call the maintenance crew and they’ll be there in a jiffy!
- Utilities are generally cheaper – This is only true of apartment rentals, but it’s still a viable point. It’s a lot easier to heat and cool 750 square feet as opposed to 1,500 square feet. Also, there are some complexes that include utilities as part of your rent.
- Your rates will go up – That’s right! Two things are certain in life: death and your rent going up. Okay, that’s a little extreme. But your rent will increase every year.
- There are no financial incentives – When you pay your rent, it just goes into your landlord’s pocket. The only thing you get in return is a roof over your head and a place to shower!
- No freedom to renovate – Unless you have permission from your landlord, you can’t do much to the appearance besides hanging a few pictures. Sorry, but you can’t knock out that wall and build a Swedish sauna.
When to Buy Instead of Rent
Okay, now that you can see renting is not a mortal sin, we can take a look at when to buy. Homeownership is a rewarding endeavor. Not to mention, it’s the real American dream! However, it’s best not to allow your dream to turn into a nightmare. So let’s take a look at when it’s the right to consider buying versus renting.
When Should I Buy?
Trust me, the very last thing you want to do is to face foreclosure. What is a foreclosure? To put it simply, it means the bank takes possession of your house because you can’t make the payments. Therefore, you want to make sure you’re in a healthy financial state before you buy a house. As I said, I want you to live the dream rather than the nightmare. So, here’s how you know when you’re ready to buy:
When you’re out of debt
Imagine that you have a $400 student loan payment, a $300 car payment, and a $500 credit card payment. That’s $1,200 a month going towards debt! Now, let’s pretend that you worked a plan and paid off that debt. How much more secure would you feel? Plus, you have an extra $1,200 to put towards other goals!
Reducing your debt before purchasing a home gives you more security. Furthermore, it will reduce your odds of foreclosure significantly. Free up that cash flow and start living the dream!
When you have 3-6 months worth of expenses saved in an emergency fund
Speaking of security, an emergency fund is essential. This is money you can use when you lose a job, lose a limb, or during any other life-altering situation. And no, replacing a broken TV is not an emergency. You only use your emergency fund for the four walls: food, shelter, transportation, and utilities.
Having an emergency fund could be the buffer between you and the streets. Therefore, make sure you build up 3-6 months of expenses before you even consider buying a house.
When you can make a down payment of at least 10-20%
Yes, 20% down is A LOT of money. However, putting down 20% can save you even more money in the long run. If you don’t have a good down payment, you’ll have to pay private mortgage insurance (PMI). On a $200,000 mortgage, PMI would cost you an extra $100-$250 per month. By the way, PMI does nothing to protect you. It’s to protect the lender in case you can’t make payments. In other words, your money literally goes towards nothing.
Of course, I won’t yell at you if you make a 10% down payment instead. However, a 20% payment is still better and will help you build equity much faster. Once you have an emergency fund in place, just keep plugging along until you have a decent down payment!
When your total mortgage payment is no more than 25% of your monthly take-home pay
This one may seem like the most improbable of all. However, when your monthly mortgage payment is only 25% of your take-home pay, you’ll breathe easier at night. First, let’s define what I mean by take-home pay. I’m talking about your net income as opposed to gross. In other words, your net, or take-home pay, is the amount you receive after your employer takes out taxes, insurance, and other benefits. This is the money you use to live.
But why 25%? It’s really to keep you from becoming house-poor. If you tie up all of your money in your house, it leaves little room for other investments.
Also, I recommend taking out a 15-year conventional mortgage. Sure, other programs require a smaller down payment, but they’re not “cheaper.” On the contrary, other loan programs will cost tens of thousands of dollars MORE in interest over the years! Besides, debt is risky. According to my extensive research, 100% of foreclosed homes had a mortgage on them. Moreover, if you get a 15-year mortgage, your house is yours in just 15 years!
When you plan to be in the same location for at least 3 years
Buying a house is an investment. Of course, you can also make money by “flipping” houses. But the reality is most of us aren’t house flippers. We just want a place to live. Therefore, I recommend buying if you plan to stay in the same location for at least three years. Why? Because this gives you a chance to build up equity in your home.
Your house might be worth $220,000 now. However, when you bought the house, you probably paid somewhere around $6,000 in closing costs (unless the seller covered these). You’ll need some time for your property to appreciate before you sell it (appreciation simply means to grow in value).
For example, using the above numbers let’s say your house appreciates at 4% per year. After one year, your house is worth $228,800. Pretty good! You made up for the closing costs! So why wait two more years before selling it? Well, you also need to consider real estate agent fees. Between the buying and selling agent, it will cost around 6% of the sale. After two more years, your house will be worth around $247,500. When you sell the house, you’ll end up paying around $14,850 in agent fees. However, you’ll still profit more than $12,000 after you sell. Not bad!
The point I’m making is this: give your property time to appreciate. Trust me, it’s totally worth it!
Advantages and Disadvantages to Buying
Just like with renting, buying also has it’s advantages and disadvantages. You’ll want to take these into account as you look at buying versus renting. However, you’ll notice that buying has considerably more advantages!
- When you pay your mortgage, you come closer to owning your home outright – This is a big one! The more you pay your mortgage, the more of your home you own!
- Houses typically appreciate in value – That’s right! Unless you live in a poor area, your house will likely go up in value.
- There are tax advantages – You can deduct your property tax payments and mortgage interest from your income! Of course, this only works if your other deductions total more than your standard deduction for the year. See a tax pro for more information.
- Privacy – Unless you live in a bustling city, you’ll likely have a lot more privacy. And yes, you can go ahead and build that huge privacy fence!
- You can do what you want with it – Do you want a jungle-island themed home? Go for it! It’s yours to do with as you please! However, the exception for some would be if you had an HOA.
- It belongs to you – Your house is your domain! Therefore, you have all the advantages above and more!
- Relocating is more difficult – When you own your home, moving isn’t as easy as picking up and leaving. Instead, you have to wait for the house to sell. You may even find yourself in a situation where you have to pay two mortgages.
- There are more expenses – Trash, sewer, lawn care, electricity, property taxes, homeowner’s insurance, and more. All of these things are your responsibility.
- You’re responsible for maintenance and repairs – If something breaks, you fix it. Or you hire someone to fix it. Either way, you foot the bill.
Buying Versus Renting: Which One is Best?
In the long run, buying obviously has more advantages than renting. Being a homeowner helps boost your net worth significantly and gets you on the path to true wealth-building! However, that doesn’t mean you should rush into buying a house. As we’ve seen, there are times when renting is perfectly fine.
So, how do we go about making a decision? There are a few things you should do as you consider buying versus renting.
1. Pray about it
First and foremost, I recommend going before God and asking him for wisdom. God ultimately knows our needs and desires, and no decision should be made without him! Seek to make the decision that will most glorify him. “And this is the confidence that we have toward him, that if we ask anything according to his will he hears us.” – 1 John 5:14
2. Ask yourself why
Why do you want a house? What advantages will it bring you? Will this help you with your vision for your life? These are all important questions to ask yourself. If you want to buy a house just so you can look good to your friends and family, you’re buying it for the wrong reason.
As you consider buying versus renting, create a vision for your life and ask yourself whether buying a house will help you get there. “Where there is no vision, the people perish.” – Proverbs 29:18a
3. Take a good, honest look at your financial situation
How much debt do you have? Do you have a 3-6 month emergency fund? Are you able to save for a down payment? These are all questions you need to ask yourself while looking at buying versus renting. Furthermore, you also need to look at how much house you can afford. Get out the calculator and start crunching some numbers!
Again, the last thing you want is to find yourself in foreclosure. Count the cost and see if you can truly afford to buy a house. “For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it?” – Luke 14:28
4. Work with a real estate professional
As you continue to evaluate buying versus renting, you should also consult a real estate professional. And I don’t mean just any agent that crosses your path. I’m talking about an agent who’s a real tiger! Above all, make sure you work with someone who fights for you.
Take some time to interview three or four agents. After that, work with the one who you believe will be on your side, who will be honest with you, and who will walk with you through the whole process. “Without counsel plans fail, but with many advisers they succeed.” – Proverbs 15:22
5. Pray again before you make your decision
Yes, I’m telling you to pray more! You are a steward of God’s gifts. Therefore, you need to be in constant communication with him before you make this decision. So, go into your closet, shut the door, and talk to the Lord. And see what direction he takes you as you evaluate buying versus renting.
Carefully Evaluate Buying Versus Renting
As you now know, there’s a lot to consider when it comes to buying versus renting. It’s better to continue renting in some situations, while it’s better to buy in others. Either way, take a look at your situation. And whatever you do, don’t give in to emotion and impulse buying!
It’s always a good idea to have a plan to put yourself in a good financial situation. Fortunately, there are tons of resources out there to help you!
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