I was reading an interesting article in the New York Times discussing how declining home prices have made buying a home attractive again. Many people are asking the question, “Is now the time to buy a home?” Extremely low interest rates, lots of inventory, and cheap prices are all reasons why people are having the fever to buy again. But, is it right for you to buy now? Let’s take a look at a few of the factors to weigh when making the decision to buy or to rent:
When To Buy A Home
Buying a home is one of the biggest investments that you will ever make. If you have excellent credit, a stable job, and plenty of cash in the bank, then buying a home may be a wise financial decision for you. Depressed home prices have created great buying opportunities for homebuyers in many part of the nation. The advantages of home ownership are as follows:
Tax deductions
Mortgage interest payments and property tax payments can be deducted from your taxes. This can add up to substantial savings over the life of the loan.
Potential price appreciation
It may not seem like it but home prices will rise again one day. Home prices have risen an average of 4% to 5% historically.
Building equity
Buying a home lets buyers build up equity which can be accessed in emergency situations.
Feeling of pride that comes with owning your home
Owning a home brings a sense of pride and accomplishment to homeowners. It also provides a sense of comfort and stability.
When You Should Rent
Although owning a home can be a wise decision for your financial future, there are some occasions when it makes greater financial sense to rent. Never buy a home if you are unsure whether or not you want to live in a particular area for an extended time period. Many people buy homes thinking that they can quickly sell them or rent them out if they choose not to live there anymore. Buying a home is a commitment and a long-term investment. It is not something to be entered into lightly. You should never purchase a home unless you are willing to live there for at least 5 years. Real estate is an illiquid asset and can be hard to sell during economic downturns. Condo owners have had a particularly difficult time unloading their properties recently.
Renting To Own
Renting may also be a better option than buying when you are looking to rebuild your credit history. It has become increasingly difficult to get a mortgage loan without pristine credit over the past 2 years. This is due to the large number of bad subprime loans that were written during the real estate boom. With so many unsold homes on the market, you may be able to prove your creditworthiness to a financial institution by entering a rental agreement. Let’s say a house has a mortgage payment of $1300.00 per month. You can enter a rent-to-own agreement in which you are making rental payments that are close to the value of the mortgage. After 2 years of making payments on time, you could approach a bank about obtaining a mortgage. This would demonstrate that you have been able to make the rental payments on time and are ready to assume the mortgage on the property.
How To Tell Whether To Rent Or Buy
If you are still on the fence about whether to buy or rent, use the rent ratio. The rent ratio is when you take the purchase price of a house and divide it by the yearly cost of renting a home. According to the New York Times article, “the number 20 provides a useful rule of thumb. When you do the math, you discover that a ratio above 20 means you should at least consider renting, especially if you may move again in the next five years or so. When the ratio is well below 20, the case for buying becomes a lot stronger.” Also, make sure to factor in other costs associated with owning a home such as homeowner association fees, property taxes, homeowners insurance, and maintenance costs.
Also, know your personal situation. If you’ve got debt up to your eyeballs or you’ve just gone through a big life change such as marriage, a newborn, divorce, or a death in the family, taking on the responsibility of owning a home might not be in your best interest.
Which one do you think is the better financial decision? Do you think that there are cases when renting is a better decision than home ownership?
(Photo credit: brokersaunders)
