Realizing or deciding it’s time to move to a new home is the easy part. From there, comes the choice to buy a home or to rent. This is where it gets difficult.
Basically, everyone has their own unique set of pros and cons to consider.
Ask the following six questions to help you in deciding whether to rent or buy.
1. How much money do you have saved up?
Start with an evaluation of your financial health. Figure out how much money you have for a down payment or deposit on a rental. Down payments are typically 5% to 20% of the price of the home.
Security deposits on rentals are usually about one month of rent and more if you have a pet. But be sure to keep enough in savings for an emergency. It’s a good idea to have three to six months of living expenses to cover unexpected costs.
2. How much debt do you have?
Consider all of your current and expected financial obligations like your car payment and insurance, credit card debt and student loans.
Make sure you will be able to make all the payments in addition to the cost of a new home. Aim to keep total rent or mortgage payments plus utilities to less than 25% to 30% of your gross monthly income. Recent regulatory changes limit debt to income (DTI) ratio on most mortgage loans to 43%.
3. How long will you stay?
Generally, the longer you plan to live someplace, the more it makes sense to buy.
Over time, you can build equity in your home. On the other hand, renters have greater flexibility to move and fewer maintenance costs.
Carefully consider your current life and work situation and think about how long you want to stay.
4. What is your credit score?
A high credit score indicates strong creditworthiness. Both renters and home buyers can expect to have their credit history examined.
A low credit score can keep you from qualifying for the rental you want or a low interest rate on your mortgage loan. If your credit score is low, you may want to delay moving into a new home and take steps to raise your score.
5. Have you factored in all the costs?
Create a hypothetical budget for your new home.
Find the average cost of utilities in your area, factor in gas, electricity, water and cable. Find out if you will have to pay for parking or trash pickup.
Consider the cost of yard maintenance and other basic maintenance costs like replacing the air filter every three months.
If you are planning to buy a home, factor in real estate taxes, mortgage insurance and possibly a homeowner association fee. Renters should consider the cost of rental insurance.
That’s the adage most familiar to those interested in home buying, but renters also need to factor transportation costs into choosing where to live.
Studies suggest for every dollar a family saves on housing in an area that is more affordable, they spend 77 cents more in transportation.
Think carefully about your commute and how much household income will be required to meet both housing and transportation costs.