You’ve conquered college. You’ve checked a couple must-visits off your travel bucket list. You’ve mastered the five-day workweek. What’s next?
Maybe it’s to check off the next box on your adulting to-do checklist. That is: to buy a home.
A recent report from the National Association of Realtors says that the typical age of a first-time homebuyer is 36. That’s older than the previous years. But it shouldn’t be a surprise since home prices are high and competition is fierce.1
However, there’s still plenty of good reasons to throw your hat into the home ownership ring. We’ll take a look at a few of them. Maybe the timing just isn’t right to go from renting to owning. That’s OK. There are reasons why renting is still a good option for some.
Considerations for buying vs. renting
Let the money work for you. One of the perks of owning your own home is that you’re putting the monthly payment — that used to profit your landlord — to work for you.
Over the years, you’ll be growing equity in your home and building personal wealth.
In order to build equity, it’s important that you own your home for a few years. Some experts recommend at least five to seven years.2
Then, any value (equity) that appreciates over time is yours to keep when you sell the home. Also, you can use the increased equity to your advantage, while still living in your home. Use it for a home equity loan, home equity line of credit (HELOC), or a cash-out refinance of the mortgage loan.3 This allows you to invest in additional real estate, make home improvements, or consolidate any high-interest debt.4
Tax advantages. What do mortgage interest, home-equity-loan interest, property taxes, certain home improvements (for someone living in the home who has a medical issue or a disability), and home-office costs (for a homeowner/business owner) all have in common? They all qualify homeowners for significant tax deductions.5
Unexpected costs. As a renter, there are plenty of costs that you don’t have to worry about, such as fixing a broken washing machine, a garbage disposal, or a plumbing issue. A responsible landlord will fix it or replace it within a reasonable amount of time — at no cost to you.
On the other hand, as a homeowner, these seemingly small fixes can become expensive, especially if they’re not in your budget. And the possibility of bigger fixes (i.e., a new water heater or an air conditioner) can become problematic if you don’t have the money to cover them.
Also, keep in mind that homeowners are responsible for homeowners insurance, property taxes, and homeowner’s association (HOA) fees (that can increase from year to year), which cover lawn services, snow removal, and more.
Freedom to move. It’s easier for renters to be footloose and fancy free. Those who work from home could have the freedom to work wherever they want, meaning that after their lease ends they can live in different locations around the country — and maybe even the world.
Also, empty-nesters and retirees who’ve owned their own home might decide to sell and move to a new location. Using the money from the sale of the home on another mortgage in a new city or town is fine. However, renting a home allows you to make sure it’s the right fit before you commit to another mortgage.2
Freedom to settle down. Perhaps you’re at the stage in your life where putting down your roots in a community you love is important. Buying a home in the neighborhood can give you and your family a sense of stability. And a home located in a good school district for your children is the icing on the cake.2
Create your space
Decorate and renovate your space. When you move into your rental, it’s usually a blank slate. But you are limited on the personal touches you can add to it. A coat of paint on the walls is probably fine, but be prepared to return them to their original color before you move out. Owning a home gives you much more freedom to design your surroundings how you’d like them to be — as long as they’re in the budget. Keep in mind: An HOA can dictate the changes you’d like to make to your space, both indoors and outdoors.
Understand your financial situation
When determining how much you can afford for a home, consider at least these two things: upfront costs and monthly payments.
Upfront expenses include the down payment and closing costs (appraisal, underwriting fee, mortgage origination fee, some property taxes). Be sure that after all is said and done you have enough money left over in your emergency fund or savings account to be able to pay for unexpected expenses down the road.6 You might come across them quicker than you think.
To figure out how much you can afford in a monthly payment, consider the 28/36 rule. This means 28% or less of your gross monthly income should go toward housing costs, including your mortgage, property taxes, mortgage and homeowners insurance, and HOA fees. And you shouldn’t spend more than 36% of your gross monthly income on all your debts , including your mortgage, car loan payments, and student loan debt.6
If the upfront expenses or the monthly payments feel overwhelming, then renting might be your best choice.
Have a high score. The lowest interest rates go to those with credit scores in the 700s.7 If you need to boost your score, consider doing a few things:
- Pay down your revolving credit balances.
- Check your credit report for errors. (About 25% of Americans have them.)
- If your credit report has some paid-off negative entries, ask for them to be removed.8
Calculate your debt
Debt lower than income. It’s not necessary — or even realistic — to be totally debt-free before buying a home. Most people have some form of debt, be it student, auto, or medical. The important thing is that your accumulated debt is lower than your income. This is called debt-to-income ratio (DTI), and the lower it is the easier it will be to pay a monthly mortgage.7
How much? It’s best to shoot for 20 percent — that should be your goal. Then, you won’t have to pay private mortgage insurance (PMI) and you’ll save on interest on your loan over time.
However, you can put as low as 5 percent down (for conventional loans) or 3.5 percent down (for FHA loans). And if you qualify for a USDA or a VA loan, you don’t need any down payment.7
Save, save, save. The down payment isn’t the only thing to be saving for. Having an emergency fund financially prepares you for unexpected expenses that might occur after purchasing your home. It’s recommended that you have 3 to 6 months’ of expenses saved, in addition to your down payment.7
Employment and income
Stable and steady. Lenders like it when you’ve worked at the same job for 24 months or longer. It suggests financial security and it’s easier for lenders to determine your average income. During the underwriting process, you must show proof of income with W-2 forms and tax returns (for employees) and W-2 forms and 1099 forms (for self-employed workers).7
Whatever you decide to do — rent or buy — be sure it works with your lifestyle and your finances. Because wherever you live, you want it to feel like “home sweet home.”