Is it Better to Buy or Rent a Home?

Seeing home prices and rents going up and wondering if now might be a good time to fire your landlord and join Team Homeowner? During 2020, 37% of homebuyers were Millennials, so if that’s your tribe, it might seem like all your friends are doing it. But since it’s likely the biggest purchase you’ll ever make, sensible decision making – not FOMO – should probably be your guide for determining whether it’s better for you to buy or rent a home. Here are some things to think about.

Advantages of Renting Over Buying

One of the best things about renting is that you can pack and up and move pretty much at will, or at least once your lease is up. If you’re just starting out – career-wise or relationship-wise — or not sure where you’re going to want to live long-term, that flexibility is a huge advantage. If you’re not super-handy, and don’t have an interest in learning about home maintenance and repair, the ability to simply call your landlord or management company can be priceless when there’s a roof leak, the HVAC quits working, or something else breaks. And, of course, the fact that you also don’t have to budget for the costs that go with major home repairs can make renting very appealing if you don’t have a substantial emergency fund.

Reasons to Buy a Home

For all the pros of renting, there’s no getting around a key fact: when you’re renting, you’re making someone else’s mortgage payment. So, while you get to live in a place relatively carefree, it’s the property owner that’s steadily building equity (wealth) in the home. For lots of property owners that equity has skyrocketed in recent years, as home values have risen dramatically in many markets throughout California and nationwide. And, historically, home ownership – specifically, living in a home you own — has been a key means for many middle class Americans to build long-term savings and family wealth.

Plus, there are lots of tax advantages for homeowners that renters can’t access. We’re not giving tax advice, of course, but homeowners can typically deduct things like mortgage interest and property taxes, as well as mortgage insurance and various costs related to the initial purchase of the home.

So, if you’re in a position to buy, there are lots of good financial reasons to consider it. But there are also lots of non-financial reasons many people wish to own home. Are you the kind of person who likes to make a place your own, with your own design touches? Depending on where you live, a landlord may not be okay with you repainting, switching out flooring or window coverings, or changing up the landscaping. Plus, it may not be a great move financially to invest that kind of cash into a property you don’t own.

Another reason many people choose to buy in certain areas is to make sure their children have access to high quality public schools. While you tend to get less house for your money in prime areas, the thinking is that it may be worth it since you might otherwise feel a need to invest in private school which is also pricey.

But How Much Can You Afford?

Okay, so say you’re leaning toward buying. (We’re all getting super-excited now!) You may think you know how much money you can afford to spend on a home – after all, you already know how much you’re paying in rent, right? But unless you’re paying cash for it, you’ve got to know what a mortgage lender thinks you can afford. In America’s highest-cost cities, many of which are in California, people often pay more than 50% of their income on housing. However, there’s probably not a lender on the planet that would approve a mortgage under those circumstances!

A better approach is to plan on spending around 28% of your pre-tax income on a mortgage. If you want to be conservative, shoot for total debt of no more than a third to 40% of your after-tax income. But no matter what, step one is to get preapproved for a mortgage so you know for sure where you stand, with the income you have.

Do a Real Cost Comparison

With your preapproval in hand, you’ll know how much money you can afford to spend on a home but remember that you can’t just weigh monthly rent versus monthly mortgage. Both alternatives can contain a boatload of hidden costs. For example, some rentals include things like basic utilities, cable/internet, and pest control that you’ll have to cover with your own home. On the other hand, with your own home you’re unlikely to have to shell out extra cash for things like pet deposits, parking, and storage, which is common with rentals.

Be sure you do thorough research, so you don’t skew the equation in one direction or the other. Check out these handy calculators to run some numbers.

Am I Ready to Buy a Home?

To answer that big question, you’ve also got to ask yourself how long you’re planning to stay put. That’s because a home isn’t what we’d call a liquid asset – you may not be able to readily sell it at a good price, at any given time. So, before taking on a mortgage, you’ll want to be sure that you’ll be in the home long enough to recoup the upfront costs you’ll need to cover. For example, mortgage closing costs can range from 2-6% of the purchase price, and include things like title insurance, appraisals, and home inspections. A good rule of thumb is that you should plan to stay in the home for at least five years to make it worth your while to buy or refinance a home. Doing so reduces the odds of having to sell for less than you have invested in the home.

Wanna Talk it Over?

Our home loan experts are here to help. Reach out for help getting preapproved, figuring out how much you can afford to spend, for guidance on choosing the right type of loan for your individual goals, and for support throughout the home buying process.

This information is provided for educational purposes. Must meet membership and account criteria. All loans subject to credit approval. Restriction Apply. Consult a qualified tax professional.