It is often a tough decision of renting or buying a house. How do you know which is best for you? There are quite a few forces involved in making the decision. Certainly there are many pros and cons of buying versus renting.
Everything aside, there are four important things you should keep at the top of your list when trying to decide.
Monthly payment affordability
There is nothing worse than having a monthly mortgage payment (including insurance and taxes) put a squeeze on other areas of spending in your monthly budget. Such a squeeze can leave you wondering why you made the home purchase decision when you’re frustrated you don’t have enough money to go out and have some fun or meet other expenses. You have to keep housing costs within control.
Practically speaking, Crown Financial Ministries recommends that your home associated costs be no more than 33% of NSI (Net spendable Income) for a family of four. Net Spendable Income is money left over after taxes and tithing. As a safeguard against stretching your house payment too far, Crown includes home associated costs within the 33%. Such costs include electric, water, maintenance, etc. If you can stay within the 33% you’re in good shape to have adequate funds for other areas of the budget. You visit Crown’s website to view find a spending guide that fits your situation.
Down payment amount
Often mentioned and critical is the amount of money you have on-hand for a down payment. Make sure you aren’t including various costs associated with the loan itself and prepaid expenses. Rather, it is the amount that you expect to use to put down against the sales price of the home.
Ideally, that amount should be 20% or more. It’s a good amount in that it allows you to avoid Private Mortgage Insurance (PMI). It also creates good amount of equity to protect you should the price of your house go down in value. You don’t want to owe more than your house is worth.
If you don’t have 20% to put down, consider how long it would take you to save this amount before buying. Note: your down payment shouldn’t pull from emergency cash savings. This is considered to be other critical savings that should remain in place after you’ve purchased your home. Create a savings plan and try to hit the 20% within 1-2 years if possible.
Make progress on your financial journey
Don’t forget where you are and where you’re going. If you’re using the Money Map or the Baby Steps to guide your journey, you’ll want to make sure home ownership doesn’t render you stagnant. For example, let’s say your financial journey includes tithing 10% each month, saving $1000 for emergencies and eventually getting out of debt.
You have to ask yourself if you can still make forward progress with home ownership. In other words, can you move to the next destination without being stuck in the same place for an unreasonable amount of time? The 33% mentioned earlier may allow you to do so if you don’t have debts or other unbalanced expenses squeezing your budget. If you can’t make progress on your journey, home ownership shouldn’t be your next step.
Renting may not be a waste of money
“I’m tired of renting because I’m just throwing money out the door.” Really, is that the case? Don’t be ashamed about renting or feel the pressure to get into a home because others are telling you you’re wasting money. Remember you get a shelter for your money and that’s never a bad thing.
Rather, consider that renting provides you the time you need to position yourself financially for home ownership. There is no shame in renting until a home can be affordable via down payment and monthly expenses. That’s just good stewardship, my friend.
Handy Calculator
Perhaps you want to dive deeper and do some financial analysis. As I mentioned earlier there are a lot of forces involved in making a decision to buy or rent. The Crown Rent Vs. Buy calculator attempts to forecast the net effects of all the hidden forces (interest, property taxes, tax savings, appreciation, opportunity costs, closing costs, selling costs, etc.) to help you make an even more informed decision.
What would be the most important things you would consider if you were deciding to when deciding to rent vs. buy?
Photo by TheTruthAbout…
{ 10 comments… read them below or add one }
“Remember you get a shelter for your money and that’s never a bad thing.” – Thanks so much for that statement. I am so tired of people rushing into buying a home because they are “throwing their money away”! That is not a wise way to look at money.
I think this article should be required reading for anyone considering purchasing a home. You really give a lot to think about, and provide sound advice.
This calculator just rocks for the rent vs buy question:
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
Also, don’t forget about the fact that interest paid on mortgage is tax deductible. Rent paid is not. You can claim more deductions on your W-2 and pay less tax on your earned money instead of getting a huge lump sum when you file for your taxes. This helps with paying the mortgage.
This is a question I receive often from our customers and this is an excellent post comparing the options. While owning a home for many is a sense of security if you are not ready you could be setting yourself up for financial failure.
Suzanne
Social Media Specialist
CareOne Debt Relief Services
@AskCareOne
great tips in this post, and i hope a lot of people read it, especially the part about not stretching yout budget to own a home. remember, owning a home is a lot more expensive than just paying the bills each month. there are many things that need to be maintained and even more thigns that can break down at a moments notice and cost you a lot to fix. make sure you arent spending your last dollars to make a downpayment!
For most of my clients, I often find that purchasing a home will be detrimental financially. They still want to ignore the economics of the decision and base it on other (usually emotional) factors.
Thank you so much for taking the time to write this article. My husband and I have been struggling with this topic. He is against buying a home and I am for it. But you reminded me of what it means to be a good steward of our finances. I really feel that renting is a wise decision at this time. Thank you and God Bless
I rent because it’s right for me and I don’t want to spend my weekends shoveling snow or mowing grass or raking leaves or fixing a toilet or any of that junk. I want to spend my time off being off and doing things I like to do. I also like the fact that my rent hasn’t increased in 7 years, I pay $10 a month for utilities and I have a great community I get to be a part of.
As for buying, maybe it will be right for me sometime in the future, but right now it seems like everyone is just trying to entice me to buy rather than rent by citing some of the very reasons you stated above (tax deduction, it’s a great time with the depressed market, etc.), but in a way I feel like it’s all a little bit of a “misery loves company” thing. Or, even better, it’s like this for me: picture yourself walking past a bakery that has a wonderful smelling, irresistible, beautiful croissant in the window that on the outside looks like crispy, rich, buttery, delicious perfection. Everyone around you flocking in to this bakery to get one of these babies. People inside at the tables all really seem to be happy that they got one. Plus, the price is great – even lower than yesterday (bonus!), AND they’ll even give you a free cup of coffee to go with your lovely croissant! You go in to check things out and the bakery seems clean and you’ve heard good things about the place from friends, so you decide to go for it and you order one. You can’t wait to get your hands on it and bite into it’s yummy goodness. You pay your bill, sign the receipt, and you’re gleefully skipping away with your free coffee and croissant. But when you go to enjoy your seemingly perfect croissant and you cut it open, instead of warm, flaky, soft goodness, you find that inside is a bunch of nasty worms! It’s nothing like you were told or hoped it would be, it’s not enjoyable or edible at all like the people in the bakery made it out to be, and you feel duped, like you’ve been sold a bad bill of goods!
Truthfully, THAT’S how home ownership feels to me – like everyone is just trying to get me to buy in by trying to pass it off as something enticing even though they know it’s all one big sham.
The bottom line is that my “American Dream” may not include home ownership, and I know I may be the minority, but I just really don’t think it’s all it’s been cracked up to be for decades in this country. Buying a home comes with an ideology and philosophy that I’m not sure I agree with, any financial planner worth their salt will tell you that truthfully a house is nothing buy a liability, I definitely don’t trust the real estate/mortgage industry right now, and no matter what incentives or deals or programs are put out there to entice buyers, I’m just not convinced that I need to buy into the hype.
I RENT AN APARTMENT ON THE BEACH. IT HAS A SWIMMING POOL, GYM, REC ROOM, COVERED PARKING, SECURITY, NEARBY STORES, HOSPITALS, PUBLIC TRANSPORTATION, THE BEACH,,,,ETC ETC….NO POOL CLEANING, NO CHEMICALS TO BUY, NO GRASS TO MOW, MAINTENANCE FREE, NO REPAIRS TO WORRY ABOUT.BALCONY OVERLOOKING THE BEACH, IF I HATE MY NEIGHBORS I CAN MOVE TO ANOTHER APARTMENT OR AREA….I OWNED A HOME FOR 40 YEARS,,,NO CONTEST,,,RENTING IS BETTER.
Thanks for the post. My sister and I are single moms and we both rent. The issue that I have is Landlords who do not pay the mortgage! The home went into foreclosure and my sister found out she had 24 hours to move! The sheriff came and put a notice on the door with no notice! I know other friends that have had this same experience. How can we protect ourselves from this?. Is there something that we can do legally?.