Buying a home used to be a requirement of the American Dream. Rent was considered a waste of money and real estate lauded as the safest investment because its value “always went up.” But recent studies by economists and statisticians have proved that neither of these statements is always true. It turns out the decision between renting or buying your next home is completely dependent on your situation.
You Should Rent if:
You’re not planning to stay at least five years. Finding a home you can afford and then making money off that home is largely dependent on timing and it’s not guaranteed. Two Yale economists named Karl Case and Robert Shiller proved that when they tracked the median price of American homes over the course of 100 years. What they found was that once they accounted for inflation, the real price of homes fluctuated a little bit, sometimes increasing, sometimes decreasing. So if you bought and sold at the wrong time, it may have looked as though you made money on this investment, but you actually lost money.
Since timing the market to make money involves a large amount of luck, financial planners recommend buying a home if you’re planning to stay in it for five years. That’s the approximate amount of time it will take for you to build enough equity in your home to repay the closing costs.
You’re short on cash or living paycheck-to-paycheck. If your down payment is less than 20%, you will pay a higher interest rate and have a bigger mortgage payment because you need to borrow more money (while being charged the higher interest rate), and you will have to pay for private mortgage insurance which equals 0.5-1.2% of the loan amount. That adds a significant cost to your monthly payment and might not leave room for retirement or rainy day savings.
Your employment is unstable. If your company isn’t doing well, or you’re an independent contractor or freelancer whose income fluctuates, it might make more sense to rent. When you rent, you can always move to a cheaper apartment or city in order to save on housing costs, but you don’t have the same flexibility if you own a home with a mortgage.
You’re going through a major life change. Major life changes like divorce or the death of a spouse have a way of making us want to do drastic things. But once those impulses fade we may regret those decisions. If you’re going through a major life change, it might make more sense to rent until you’re on surer footing.
If you don’t have the capital to buy a home, you can still build wealth by investing in the stock market. In the 100-year period between December 1916- January 2017, the Dow Jones Industrial Average increased in real value by 914%. Conversely, real housing values only rose 73% during that time.
You Should Buy a Home if:
You can cover the additional costs of owning a home. If you’ve got the 20% down payment, the closings costs, property taxes, homeowners insurance and the money, time and energy to maintain the house, you should definitely buy your next home.
You’re planning to buy your “forever home.” If you can afford to buy the home and you’re planning on living in it until you pass it on to your children, then buying makes sense. Especially if you get a 20-year mortgage and resist the urge to borrow against your equity with a second loan. Seniors who have low housing costs because they have no mortgage (or a very small one), have an easier time paying for medical costs should a health issue arise, and they are more likely to stay in their homes throughout their golden years.
Starting in 2018, you can write off up to $10,000 of the mortgage interest you pay on your primary residence. So in addition to building equity, you’re also rewarded with a tax break just for being a homeowner.
The decision to rent or buy your next home is a deeply personal one that is completely dependent on your financial situation and goals. So if you’re struggling with the decision, make an appointment with a financial advisor. You can run different scenarios by them to give you a better understanding of your options.
