Is it better to rent or buy a house? The answer depends on you and your financial situation. Asking the right questions before you buy a house is a good starting point to help you analyze the pros and cons of renting or buying your next home.
Do You Have a 20% Down Payment?
Although it’s possible to secure a loan with a lower down payment (the minimum down payment for a Federal Housing Administration (FHA) loan, for example, is 3.5%) 20% is the down payment required for a conventional home loan.
A higher down payment also means lower monthly payments. Consider this: A $200,000 loan at 4% interest has a monthly payment is $1,269 when you make a 3.5% down payment. That payment drops to $954 per month with a 20% down payment.
You’ll also avoid paying private mortgage insurance (PMI) with a conventional loan. On that $200,000 loan with a 3.5% down payment, PMI is $158 per month.
Finally, a higher down payment could also help you secure a lower interest rate. Depending on how much you have saved, buying a home (versus renting one) may help you save money in the long run.
Do You Have a Good Credit Score?
Lenders use your credit score to determine your eligibility for a mortgage and the interest rate on the loan. Similarly, a landlord may also check your credit score.
A low score might make it impossible to qualify for a mortgage, or if you do qualify, the higher interest rate could put the monthly payments out of reach.
Do You Have an Emergency Fund?
If you’re thinking about buying a home, it’s essential to have cash set aside for emergencies (in addition to your down payment). Homeowners can’t call the landlord if the garbage disposal breaks or the roof leaks, and failing to keep up with maintenance can affect the value of your home.
What’s an appropriate emergency fund size? Again, it depends on your situation, but six months of living expenses should do the trick. This way, if an air conditioning unit goes out, you can cover the cost and still have money left for other emergencies, like an emergency room visit or unemployment.
Do You Want Your Living Expenses to Remain Stable?
Even if your monthly mortgage would be the same as the amount you pay for rent now, a 30-year mortgage at a fixed rate guarantees your monthly payment will remain stable for decades. In contrast, your landlord could raise the rent at the end of your lease, or rental costs could change significantly in your area. The National Association of Realtors reports that the cost of renting has increased in 64% of U.S. markets.
Do You Want the Flexibility to Move in the Next 5 Years?
There are a lot of upfront costs when you buy a house. It takes about five years to offset the costs of a down payment, mortgage application/loan fees and home inspections. And selling comes with its own set of fees, including real estate commissions. Renting offers a lot more flexibility if you’re not ready to settle down just yet; buying should be considered a long-term option. Calculate your cost comparisons between renting and buying to help you make a better decision.
Plan for What’s Next
Whether you’re ready to buy a home or you’re preparing to buy a home, your Farm Bureau agent can help you put together a financial plan to help you achieve your goals.