It is not uncommon for people who have started families or have reached a certain age to get pressured into buying homes. While expectations can come from different quarters, basing a decision as big as buying a home is not something you would want to rush into. After all, living on rent does come with its share of pros. So, when it comes to buying or renting a home, which way should you go?
One of the biggest arguments in favor of home buying is that the property serves as an investment. However, it is not uncommon for people to miscalculate or overestimate their return on investment. Besides, homes don’t necessarily work as appreciating assets all of the time.
According to Robert Shiller, a Nobel Prize winner and a Yale economist, real inflation-corrected prices of homes from 1890 to 1990 remained “virtually unchanged”. Analysis of Shiller’s data revealed that home prices had grown at a compound annual rate of as little as 0.3%, adjusted for inflation, during a 100-year period.
When you decide to buy a home, it is important that you do not put all your financial eggs in one basket. This requires that you hang on to some of your investable assets. It is also crucial that you look at your purchase as a right to housing instead of a long-term investment that will yield great dividends.
According to most experts, housing may work well as an investment, but not as a great investment. As a result, if your main aim in buying a home in investment, you might be better off putting your money in a well balanced and diversified portfolio of stocks and bonds.
Buying a home comes with its shares of pitfalls and limitations, which you should know about at the very onset. This way, you may prepare yourself to avoid or overcome any nasty surprises down the road.
When you live on rent, you may choose to move out when the contract expires or by providing the required notice period. This gives you the freedom to move from one neighborhood to another, and even relocate to another city. When you buy a house, moving out becomes harder because you may not find a suitable buyer when you want. Alternatively, you might end up selling your home for lesser than it is worth simply because you are in a hurry.
If you think you might have to relocate because of work or because of family obligations, it might be in your best interest to continue living on rent. Ideally, consider buying a home if you plan to live in it for at least five years.
Depending on the type of home loan you seek, your credit score, and the mortgage provider you select, you will need to make a down payment of 5% to 20% of the home’s selling price. You typically need to pay this amount in one go, before the lender disburses the loan amount.
Making a down payment that is as large as financially viable for you is the best way forward. This is because a larger down payment reduces the amount you end up paying as interest in the long run. However, this also requires that you come up with a significant amount of cash at one time. As a renter, you have a lot less financial responsibility.
You do not have to buy a house just because you qualify for a mortgage, and this is a mistake some people end up making. Before you buy a home, take time to look at your spending habits and existing debt carefully. If you have significant debt, you might want to reduce your financial burden before you think about getting a home loan. This is because not paying your mortgage in a timely manner will have an adverse effect on your creditworthiness. However, if you have a low debt-to-income ratio, you might consider going the homeownership way.
It is common for people to expect their homes to appreciate in value over time, but this is not always the case, especially if you do not prepare yourself for the long haul. If you wish to sell a house when it’s value is down, there is a good chance that you will have to settle for less than its original price. This can also be a problem if you wish to refinance your mortgage through a different lender because you might not qualify for the amount you expect. As a result, think hard about buying a house if you don’t plan to live in it for at least five years.
If you don’t plan your finances right, or if you experience a financial setback, you might not be able to keep up with your mortgage payments. In such a scenario, you risk losing your house to foreclosure. While a foreclosure might leave you financially drained, it also has a significant negative impact on your creditworthiness.
When preparing to buy a home, think about long-term costs that come within the form of home repairs and renovations. If you are stretching your budget to buy a home, keeping up with the ongoing home maintenance costs might seem challenging. In addition, if you do not spend much time in the house you purchase, you might need to spend even more to hire a caretaker.
If you feel you are emotionally and financially ready to buy a home, you may get the process underway and look forward to the benefits that home ownership has to offer.
While buying a home might seem expensive, it can actually turn out to be more affordable than renting in the long run. Depending on where you live, you might even end up spending lesser each month if you buy an affordable home and get a USDA loan or a VA loan. What also helps with these loans is that you do not have to worry about making a big down payment.
A 2017 research carried out by Trulia, a popular American real estate website, showed that it was more affordable to buy a home than to rent in all the 100 biggest metropolitan areas in the United States. However, renting remains more affordable in some of the country’s larger cities such as New York, Seattle, and San Francisco.
When you buy a home with the long term in mind, you work in building equity. When you pay rent, it is money you will never get back. Making monthly mortgage payments, on the other hand, helps you build equity. As the amount you owe toward your loan reduces, the equity you hold in your home increases. If you wish to sell your home at a later stage, the home improvements can increase the value of your home, and the equity in your home, and you still may be able to recoup some of the money spent when you sell your home or refinance.
During the initial years of repaying your mortgage, most of your payments go toward paying off the interest. The government allows you to deduct a percentage of the amount you pay as interest when you file your tax returns. While this might not seem like much, it does add up to a tidy sum over the years.
A big pro of owning a house and living in it is that you do not have to worry about looking for a new place because your existing landlord wants you to move out. When you live in a house that you call your own, you can look forward to a set neighborhood and don’t have to worry about changing schools or hospitals.
Living in a rented house does not provide the same flexibility that owning one does. For instance, if you want to modify your home’s kitchen or bathroom, you can do so as and when you want without seeking your landlord’s permission. Remodeling the interior of your home, carrying out a landscaping project, or using wallpapers of your liking is easy to do when you own your home.
Finding out if you are actually ready to buy a home is not difficult. All you need to do is answer some basic questions.
Whether you should buy a home or continue living the life of a renter depends on your individual circumstances. If you are unsure about your financial situation or plan to relocate in the near future, you might be better off living on rent. If you, on the other hand, have your finances in order and plan to stay put in the same place for a few years, buying a home might work well for you. If you do plan to buy a home, looking for a suitable mortgage lender and getting pre-qualification before you begin your search is a good idea.
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