Rent vs Buy

Lesson 10

Everyone agrees that you should not buy as much home as you are approved for. However there is controversy about buying a home you can grow into over the next 5 years or buying the most affordable home you can stand.

There is just as much controversy about renting vs buying your home for future financial success. I believe any financial gains by owning a home should be considered a perk and not an your primary investment vehicle.

Hopefully these resources can help you have enough facts to choose renting or buying confidently.

“For long-term financial stability, your monthly mortgage payment should not exceed 25 percent of your monthly income."

-Source

This goes for your max monthly rental payment as well, not over 25% of your income.

This checklist is a great first gut check if you are financially ready to own. But frankly it is good while renting as well.

Am I free from consumer debt?
Do I have a 3- to 6-month emergency fund?
Am I living on a budget and do I know how much of a payment I could comfortably afford?
Have I saved enough money for a down payment?
Do I have stable employment?
Do I plan to own the home for at least 5 years?
Can I afford the additional costs of maintaining and insuring my home and paying property taxes?

-Source

“When you own a home, you are responsible for the maintenance. Things break, wear out, and sometimes need updating. Financial advisors generally recommend saving at least 1 percent of the value of your home each year for maintenance."

-Source

The program also allows for faster mortgage payoff using 1 of 2 methods:

Pay extra EX: $100-200 to shave off 7 years of payments
Shorter term mortgage EX: 15 year mortgage could cut the time in half as well as the interest paid. - Typically include lower interest rates but have a higher monthly payment

Money created another helpful guide, "The Salary You'd Need to Buy an Average Home in Every State".

I learned about a financial equation called "Price to Rent Ratio" from Money Therapy. You just need to find the price of a home and the price of a comparable rental you are looking at to use this formula. If you like you can also try the price of the lowest cost place you could bare to live in and compare as well.

The Equation: The median price of home you're looking for / (average rent *12) = price-to-rent ratio

Example: $200,000 median home price / ($1,000 rent * 12) = 16.6

Price to rent ratio of 1 to 15 = better to buy than rent
Price to rent ratio of 16 to 20 = could be a risky buy
Price to rent ratio of 21 or more = better to rent than buy

Before you buy Money Therapy also recommends you plan to pay these two expenses.

Closing costs = 2-5% of your home cost
Home inspection = $300 average

Paraphrased, "Plan to put 10-20% of the homes value for the down payment to avoid being under water." - Source

“Aim... for a mortgage payment that’s 15% to 20% lower than your current rent to account for the added costs of ownership.” - Source