Spring is approaching, and as we head into the warmer months, many of us millennials who rent start getting more serious about whether we will be renewing our leases, or beginning down the path of finding a new home. Others who rent may be approaching the end of a semester or chapter, and need to decide what to do for housing come the Summer/Fall. But maybe you are a part of a third group that is asking his or herself, “Should I even continue to rent? Maybe I should consider purchasing a home.” If you are someone who is on the fence on renting vs. buying, here are some questions to ask yourself while determining which path may be more suitable for you.
1. Am I Willing To Deal With The Responsibility?
The most striking difference between owning vs. renting a home is the most fundamental difference between the two. In one case, you have more jurisdiction about the “law of your land,” while in the other you have the luxury of leaving any potential dirty work to your property manager, or landlord.
Owning a home is a responsibility. Keeping your grass cut and shoveling snow may be minor tasks, however these are responsibilities nonetheless that you now have to add to your to-do list (or pay for someone to take care). Or what if something stops working: a light goes out, you experience a busted pipe. You might prefer to live a hassle-free lifestyle where everything is taken care of for you without any added cost. However, as a homeowner you do also have control over how things get done and when. It could mean not having to wait longer than you should for maintenance requests to be processed, or just the overall experience of being in control of the home
2. How Do Home And Rent Prices Compare?
An article in Forbes magazine listed the top 3 places where it is cheaper to own a home than it is to rent one. Philly was listed as one of those locations. In the City of Philadelphia, the median rent price is $1,422 while the median monthly mortgage payment is $1,049. The home vs. rent price comparison is something that varies per city, as cost of living changes depending on where you are located. However, if you are in a place where you can afford the costs needed to purchase a home, especially if you would be a first-time homebuyer and not have to put down the conventional 20% to get reasonable terms, then maybe buying a home may be the right decision for you.
3. Can I Afford The Upfront Costs?
For the typical first time home buyer, if you would prefer not to put down the conventional 20%, you might be eligible for a first-time homebuyer loan. The Federal Housing Administration Loan (FHA) requires you to put down 3.5%, and there are other programs and grants that exist. You might also be interested to know that if you are in certain professions, such as a nurse or physician in the healthcare field, or an educator, you may even be eligible for 100% financing.
What you must be conscious of are the other costs that are a part of the purchase. Closing costs come out to 5-7% of the total purchase price on average, and are generally the part of the transaction that home buyers aren’t thinking about (and honestly Real Estate professionals don’t speak about enough). There are ways of decreasing closings costs by asking for seller’s assistance (up to 6% for FHA loans), and lender credits and grants do exist as well. However, you do need to think about other costs besides just the down payment, and weight your options on where else you could invest that money at this time.
4. What Are The Typical Costs To Maintaining A Home?
When you rent a home, property managers usually ask for a security deposit upon moving in. This deposit goes towards any repairs or fixes that need to occur when it comes time for you to move out. Unless you keep the property unscathed, chances are you will lose some portion of that security deposit. When you own your home, no more giving away your security deposit, however you will have to maintain the condition of your home annually if you want to keep it in good shape. This cost can typically run you between 1-3% of the purchase price, and — apart from the upfront costs and PITI payments (mortgage, taxes, insurance) — it is the other number to factor in.
5. How Is My Credit Score?
Your credit score will play a big factor in the interest rates you qualify for if purchasing. Mortgage rates have been increasing, although they are significantly lower than the the average rate historically, and will be for the foreseeable future. If you want to qualify for the lowest interest rate possible, you will want a credit score in the mid 700’s, however you may be able to get approved for a loan with a score that is as low as 580. If you are stuck between renting vs. purchasing but you have a credit score of 400, the decision may already be made for you. Programs do exist that can test your creditworthiness in alternative ways (the NACA program for instance), but they aren’t always easy to qualify for.
6. What Is My Long Term Plan?
Do you see yourself in your current city for years to come, or at least for the next few years? This is one case where it might be wise to purchase. However, even if you will be moving, it doesn’t mean that the decision must be clear-cut. For instance, you might purchase a home and rent it out knowing that you will be leaving the city soon but intending to come back years down the line. For instance, I have a colleague who purchased a home in Philly upon graduating from college, rented it out for 4 years while working in another state, knowing that she would be moving back to Philly in the future for grad school. But it all depends. Maybe you might feel a burden having a mortgage out in a different state, and want to avoid making this sort of long-term commitment.
Your choice about whether to rent or own can come down to a bunch of different factors. Maybe you prefer the more worry free situation, or maybe you want the responsibility. Homeownership is a great way to begin building equity and there are many benefits that can come with owning property, so if you are someone who is contemplating it, it is something to continue to explore.