If you're thinking about moving into a new home, you may be wondering whether renting or buying your home makes more financial sense. There are several factors that go into making that decision and you should take all of them into consideration to help make sure your decision fits your financial situation and your longer term life plans.
What's your housing budget?
Before you even start looking for a new home, it's smart to review your budget and find out how much you can afford to pay for housing without putting undue strain on your budget. You should not take on rent or mortgage payments that you wouldn't be able to make if you missed a few weeks' pay. For both renting and buying, factor in the cost of utilities, renters' or homeowners' insurance, and, for buying, annual property taxes.
How long do you plan to stay in this house?
If you're thinking of moving out of state for a new job or plan to move to a bigger home in the next few years, buying may not be the best option at this time. Most mortgages are for at least a 15 year term, so you won't have much equity in your home yet. In addition, the longer you have your mortgage, the more spread out the upfront fees included in the closing costs for your loan will be.
Do you have enough saved for a down payment?
Most financial professionals recommend that you put about 20 percent of the cost of a house down when you buy. On a $200,000 home, you'd need a $40,000 down payment. In contrast, first and last month's rent on a house that rents for $2,000 a month is only $4,000.
Would you be better off financially using the money another way?
If you have significant debt, rather than putting your savings into a down payment and the costs of owning a home, you might be better off using your money to pay down your debt and put off buying a home until you've gotten your finances in order. If you don't have debt, consider whether renting and putting the difference into your investments or retirement savings makes more sense at this point in your life.
What's Required When Buying or Renting a Home?
Both financial institutions that offer mortgages and rental agencies or landlords will look at your credit history and score. They want to see that you pay your bills on time and that you're not overextended with too many credit card balances and loans. Before you start applying for a mortgage or apartment, check your history and score to make sure there are no errors that could damage your creditworthiness.
You'll also need a strong employment history, current bank statements, pay stubs and W-2 forms, and your Social Security number for both renting and buying in most cases. Some rental agencies also require personal or professional references, a background check and contact information for your previous landlord.
When you take the time to find out whether renting or buying makes the most sense for you right now, you'll not only have a home you love, you'll also have one that fits your financial situation.