Should You Be Renting Or Owning?

Housing is one of the biggest expenses in anyone’s budget. Whether you have a mortgage or rent, there is a good chance that at least 30 percent of your income is going to housing each month. Because housing is such a big expenditure each month, those interested in buying a home or renting should really consider their finances and motives for wanting to do either.

Renting

Renting is often associated with those who have limited finances such as college students or young professionals. However, even those with large incomes choose to rent properties. The perks of renting depend of your lifestyle, and you should definitely rent a home before buying if you:

1. Don’t Know the Area

If you don’t know an area well and aren’t really sure what you want in a residence, do not buy a home. This may sound like a no brainer, but many, especially those who procure their first job in a new area, buy homes because they feel like doing so is the normal adult thing to do. Buying a home in an area that you don’t know well, even with the help of a real estate agent, can result in you being really unhappy with the location

2. Want to Boost Your Credit Score

If your credit score is below 620 you will most likely not be approved for a home loan – even if you are using a government backed program like FHA. While it may be frustrating to have wait on buying a home to boost your credit score, it is well worth it. Borrowers with higher credit scores receive better interest rates and better mortgage terms which can save you hundreds to thousands of dollars over the life of your loan.

To increase your credit score, run a credit report on yourself. If there are past delinquent accounts, pay them off. If you have already paid off delinquent accounts, call the credit company and ask them to remove the negative notations from your report. As you work on increasing your credit, pay all bills on time, and avoid opening new lines of credit at all costs. Opening another line of credit increases your potential debt to income ratio which lenders will look at, and it also causes hard inquiries to be run which will negatively affect your credit.

3. Know You’re in for a Short Stay

If you know that you will not be in an area for more than a couple of years, ideally five, then reconsider buying a house. Hiring a realtor isn’t the only cost associated with selling a home. You may find yourself having to pay for updates, staging, and marketing to get your home sold. Not to mention, if it doesn’t sell, you may be stuck paying a mortgage while paying for additional housing elsewhere.

4. Want to Increase Your Savings Account

Although there are multiple kickbacks to using government programs for affordable housing, such as FHA or USDA, a conventional loan is still king when it comes to great finance rates and reasonable mortgage terms. The biggest reason why conventional mortgage loans are so difficult to obtain is because they require a 20 percent down payment in addition to a high credit score.

If you have enough for a 20 percent down payment and that’s it, consider renting a little longer. Homes come with a laundry list of maintenance fees. If you only have enough for a down payment, you may find yourself cash poor when you need to pay insurance, homeowner association fees, and doing general maintenance around the house. In addition to saving enough for a down payment, try to save an additional 5,000 to 8,000 dollars for other home expenditures.

Owning a Home

By now we know that renting is best when you need to save money, increase your credit score, and for short stays which subsequently means that owning a home is best when you have a large savings, have a mid to high range credit score, and know you will be living in an area for at least 5 years. Although owning a home is usually associated with greater expenditures, there are a lot of perks, especially financial, associated with owning a home.

1. Equity

When you buy a home, the money that you placed in the home is called equity. The more equity you have in a home, the more you can leverage that equity to take out an equity loan. Equity loans are based on the amount of equity you have in your home, and can be used to pay off credit cards, purchase another home, or even start a business.

Another possibility is individuals 62 years and older leveraging their equity for cash through a reverse mortgage, as outlined by ReverseMortgages.com. Reverse mortgages allow homeowners struggling with their limited fixed income the opportunity to add extra cash to their budget. Instead of making a monthly mortgage payment, the lender actually makes payments to the borrower while the borrower maintains full ownership of their home.

2. Flexible Mortgage Options

When you rent a home, it is highly unlikely that you can tell your landlord that your credit score has increased so your rent should be lowered. With a mortgage lender, you can do just that to lower your mortgage payment. By refinancing your mortgage, you can obtain a lower interest rate to decrease your monthly payment and give you additional room in your monthly budget.

3. No Sudden Change of Hands

When renting a property, your landlord can change without warning, and a change of hands can result in a rent increase or even you losing your place to live. Once you buy a home, you don’t have to worry about losing your home unless you stop paying your mortgage or a natural disaster occurs.

4. Appreciation

When a home’s value increases over time it is called appreciation, and if you buy right, you can sell your home for more than what you purchased it for. When looking to buy a home, consider up and coming areas or those that are being revamped. Usually in these areas you can purchase great homes for lower prices only to sell them at a higher price in a few years.

5. Tax Breaks

FHA and USDA aren’t the only mortgages that offer tax breaks. Borrowers with conventional loans can receive large tax breaks through their mortgages as well. Mortgage interest can be deducted from taxes as long as the mortgage balance is smaller than the price of your home.

Owning or renting a home both come with their own unique set of challenges and positives. Owning a home comes attached with fees such as general maintenance and repair, private mortgage insurance, homeowner association fees, homeowners insurance, and property tax. Renting can result in dealing with unpredictable landlords and throwing money at a property that will never be yours. Before you choose to rent or buy, take the time to truly consider your needs and your financial situation.