Deciding
whether to jump into the housing market or rent instead is rarely an easy
decision – especially if you’re a first-time homebuyer. But in today’s
whirlwind market, you may find it particularly challenging to pinpoint the best
time to start exploring homeownership.
A
real estate boom during the pandemic pushed home prices to an all-time high.1
Add higher mortgage rates to the mix, and some would-be buyers are wondering if
they should wait to see if prices or rates come down.
But
is renting a better alternative? Rents have also soared along with inflation –
and are likely to continue climbing due to a persistent housing shortage.2
And while homebuyers can lock in a set mortgage payment, renters are at the
mercy of these rising costs for the foreseeable future.
So,
what's the better choice for you? There’s a lot to consider when it comes to
buying versus renting. Luckily, you don’t have to do it alone. Reach out to
schedule a free consultation and we'll help walk you through your options. You
may also find it helpful to ask yourself the following questions:
- How long
do I plan to stay in the home?
You'll
get the most financial benefit from a home purchase if you own the property for
at least five years.3 If you plan to sell in a shorter period of
time, a home purchase may not be the best choice for you.
There
are costs associated with buying and selling a home, and it may take time for
the property’s value to rise enough to offset those expenditures.
Even
though housing markets can shift from one year to the next, you’ll typically
find that a home’s value will ride out a market’s ups and downs and appreciate
with time.4 The longer you own a property, the more you are likely
to benefit from its appreciation.
Once
you’ve found a community that you’d like to stay in for several years, then
buying over renting can really pay off. You’ll not only benefit from
appreciation, but you’ll also build equity as you pay down your mortgage – and
you’ll have more security and stability overall.
Also
important: If you plan to stay in the home for the life of the mortgage, there
will come a time when you no longer have to make those payments. As a result,
your housing costs will drop dramatically, while your equity (and net worth)
continue to grow.
- Is it a
better value to buy or rent in my area?
If
you know you plan to stay put for at least five years, you should consider
whether buying or renting is the better bargain in your area.
One
helpful tool for evaluating your options is a neighborhood’s price-to-rent
ratio: just divide the median home price by the median yearly rent price. The
higher the price-to-rent ratio is, the more expensive it is to buy compared to
rent.5 Keep in mind, though, that this equation provides only a
snapshot of where the market stands today. As such, it may not accurately
account for the full impact of rising home values and rent increases over the
long term.
According
to the National Association of Realtors, a typical U.S. homeowner who purchased
a single-family existing home 10 years ago would have gained roughly $225,000
in equity — all while maintaining a steady mortgage payment.6
In
contrast, someone who chose to rent for the past 10 years would have not only
missed out on those equity gains, but they would have also seen U.S. rental
prices increase by around 66%.7
So
even if renting seems like a better bargain today, buying could be the better
long-term financial play.
Ready
to compare your options? Then reach out to schedule a free consultation. As
local market experts, we can help you interpret the numbers to determine if
buying or renting is the better value in your particular neighborhood.
- Can I
afford to be a homeowner?
If you determine that buying a home is
the better value, you’ll want to evaluate your financial readiness.
Start by examining how much you have in
savings. After committing a down payment and closing costs, will you still have
enough money left over for ancillary expenses and emergencies? If not, that’s a
sign you may be better off waiting until you’ve built a larger rainy-day fund.
Then
consider how your monthly budget will be impacted. Remember, your monthly
mortgage payment won’t be your only expense going forward. You may also need to
factor in property taxes, insurance, association fees, maintenance, and
repairs.
Still,
you could find that the monthly cost of homeownership is comparable to renting,
especially if you make a sizable down payment. Landlords often pass the extra
costs of homeowning onto tenants, so it’s not always the cheaper option.
Plus,
even though you’ll be in charge of financing your home’s upkeep if you buy,
you’ll also be the one who stands to benefit from the fruits of your
investment. Every major upgrade, for example, not only makes your home a nicer
place to live; it also helps boost your home's market value.
If
you want to buy a home but aren’t sure you can afford it, give us a call to
discuss your goals and budget. We can give you a realistic assessment of your
options and help you determine if your homeownership dreams are within reach.
- Can I
qualify for a mortgage?
If
you’re prepared to handle the costs of homeownership, you’ll next want to look
into how likely you are to get approved for a mortgage.
Every
lender will have its own criteria. But, in general, you can expect a creditor
to scrutinize your job stability, credit history, and savings to make sure you
can handle a monthly mortgage payment.
For
example, lenders like to see evidence that your income is stable and
predictable. So if you’re self-employed, you may need to provide additional
documentation proving that your earnings are dependable. A lender will also
compare your monthly debt payments to your income to make sure you aren’t at
risk of becoming financially overextended.
In
addition, a lender will check your credit report to verify that you have a
history of on-time payments and can be trusted to pay your bills. Generally,
the higher your credit score, the better your odds of securing a competitive
rate.
Whatever
your circumstances, it’s always a good idea to get preapproved for a mortgage
before you start house hunting. Let us know if you’re interested, and we’ll
give you a referral to a loan officer or mortgage broker who can help.
|
Want to learn |
- How would
owning a home change my life?
Before you begin the preapproval process,
however, it’s important to consider how homeownership would affect your life,
aside from the long-term financial gains.
In general, you should be prepared to
invest more time and energy in owning a home than you do renting one. There can
be a fair amount of upkeep involved, especially if you buy a fixer-upper or
overcommit yourself to a lot of DIY projects. If you’ve only lived in an
apartment, for example, you could be surprised by the amount of time you spend
maintaining a lawn.
On the other hand, you might relish the
chance to tinker in your very own garden, make HGTV-inspired improvements, or
play with your dog in a big backyard. Or, if you’re more social, you might
enjoy hosting family gatherings or attending block parties with other committed
homeowners.
The great thing about owning a home is
that you can generally do what you want with it – even if that means painting
your walls fiesta red one month and eggplant purple the next.
The choice – like the home – is all
yours.
HAVE MORE QUESTIONS? WE’VE GOT
ANSWERS
The
decision to buy or rent a home is among the most consequential you will make in
your lifetime. We can make the process easier by helping you compare your
options using real-time local market data. So don't hesitate to reach out for a
personalized consultation, regardless of where you are in your deliberations. We'd be happy to answer your
questions and identify actionable steps you can take now to reach your
long-term goals.
The
above references an opinion and is for informational purposes only. It is not intended to be financial, legal, or
tax advice. Consult the appropriate professionals for advice regarding your
individual needs.
Sources:
1. CNN -
https://www.cnn.com/2022/08/11/homes/home-prices-second-quarter/index.html
3. Bankrate -
https://www.bankrate.com/mortgages/5-year-real-estate-rule/
4. Federal Reserve Bank of St.
Louis -
https://fred.stlouisfed.org/series/MSPUS
5. National Association of
REALTORS - https://www.nar.realtor/blogs/economists-outlook/price-to-rent-ratios-by-state-from-2014-2019
6. National Association of
REALTORS -
https://www.nar.realtor/blogs/economists-outlook/single-family-homeowners-typically-accumulated-225K-in-housing-wealth-over-10-years
7. Statista -
https://www.statista.com/statistics/200223/median-apartment-rent-in-the-us-since-1980/