“Take advantage of low mortgage rates and build equity!,” your “buy” brain says. “Have flexibility and keep your costs of getting in and out low!,” your “rent” side says.
Ultimately, the decision comes down to your financial fitness, how long you plan to live in the home and what your cash flow looks like.
Ask yourself these three questions to find out whether renting or buying makes more sense for you.
1. Are you financially fit?
The first step is to figure out if buying is even an option.
The decision between renting or buying is less about home prices or rents and more about whether you’re ready to be a homeowner. What does your savings look like after a down payment is taken out? What is your credit score?
Andrew Dressel, a financial planner with Abundo Wealth in Minneapolis, likes people to have six months of expenses saved up in an emergency fund, $10,000 in cash to cover closing costs and moving expenses, and a credit score of 720 or higher.
“The emergency savings is of high importance and the 720 credit score has more wiggle room,” he said.
In addition, the overall cost of owning the home, including the mortgage and utilities, taxes, maintenance of appliances and the yard and the expense of everyday wear and tear should not exceed 40% of a person’s take home pay, he said.
“They need to also make sure they are not sacrificing their retirement or other goals just to own a home right now,” Dressel said.
Leo Marte, a certified financial planner with Abundant Advisors in Charlotte, North Carolina, said people should also strive to be debt-free before buying a home.
“If you are not financially ready, paying rent is essentially buying patience and insurance against homeownership costs,” he said.
2. How long will you live there?
If you only plan to live somewhere for two or three years, experts recommend renting. Especially now.
“If you are in a city and need to stay there, now is a great time to continue to rent and get more for your money,” said Jay Abolofia, a certified financial planner with Lyon Financial. “People are able to rent in the city for dramatically less because other people have fled and landlords have had to drop their rents.”
If you’re feeling overwhelmed or rushed by purchasing in some hectic markets with low inventory, he said, renting is not a bad place to land, if it’s only for a year or so.
He dismissed the sense of urgency many potential buyers are feeling to lock in mortgage rates at their current record lows, saying that interest rates and home prices often have an inverse relationship.
“When interest rates are lower, that puts upward pressure on housing prices,” he said. “Just because interest rates are low doesn’t mean it is a good time to buy and higher interest rates doesn’t mean it is a bad time to buy a home.”
But, Abolofia said, it is always a good time to buy if you’re planning on staying there for a while.
“The longer you’re going to stay, the more it makes sense to buy,” he said.
Once you’ve determined your…