Rent or buy – 6 questions to ask yourself
Should you rent or buy property? Regardless of the decision that you make, this is a key question for your financial future as you will be spending a lot of money on the property. Whether it is rental properties that you are looking for or a residential property for sale, understanding the pros and cons of both are necessary to make the best choice.
Rent may appear to be cheaper in the short term, but it leaves you with no equity and no property of your own in the long term. Purchasing a house appears to be a good financial decision in the long term, but, it may not always be the best choice under certain scenarios. It can leave you under heavy debt, which carries immense risks.
To determine whether you should rent or buy a property, you should ask yourself the following 6 questions.
1. What Are My Financial Goals?
If you buy a house, it will take you much longer to attain other financial objectives. In addition, you will have to make an effort to cut down unnecessary expenses and work harder to earn more so that you can pay the monthly mortgage. You also need to save enough in order to make the down payment, which can be a huge amount since it is a substantial percentage of your property value.
With such heavy payments, you may not be able to pay off your credit card bills or student loan on time. There is also a much greater risk of default on your loans if you burden yourself with a mortgage. Other financial objectives like retirement funds will certainly take a setback and take much longer to achieve.
Since your financial scenario is unique, you will have to decide accordingly. Make a list of your financial goals and prioritize them. If you find that your own personal property is a top priority, then buying a home might make sense. On the other hand, you may decide to become financially stronger in order to handle the mortgage.
2. Do I Have Enough Cash for the Down Payment?
If you want to purchase a property, then you must have enough money to afford the down payment, which can be substantial since it covers a large percentage of your home price. A large down payment is ideal since it gives confidence to your lender, and demonstrates your intention to pay on time. As a result, you might get a lower interest rate.
Besides having enough for the down payment, you must also pay for the closing costs, which are once again substantial. Experts suggest that a 20 percent down payment is ideal.
You may have to cut back on a lot of expenses and work harder for extra sources of income in order to afford the down payment.
3. What Is the Difference Between Rent and Home Prices?
Depending on the state of the housing market, renting or purchasing of properties may be more feasible and cost-effective. If rent starts becoming too prohibitive, then it might be better to get a mortgage for buying a home. The monthly mortgage payment might not be substantially greater than the rent, plus, it will result in equity in the end.
With rent, you don’t get equity no matter how cheap or expensive the rent might be. You will have to weigh the costs and benefits of renting vs. buying by comparing the monthly payments for both while considering the equity that you might have with a purchase.
4. How Long Will I Live in the Area?
The longer you plan to stay in an area, the more feasible it will be to buy a home. On the other hand, if you intend to move elsewhere, it might be better to rent a property.
You must answer several questions to decide how long you will live in a place. Do I have a steady job that I like? Do I face any problems in the area due to which moving elsewhere is better? Is there another place that is better for my lifestyle and choices?
Even if you plan to live in one place for a long time, you will have to consider other factors before buying a home.
5. Will I Get a Good Mortgage?
Getting a good deal on a mortgage is imperative for buying a home. If the down payment is too big for you, the interest rate is too high or the monthly payment is too much, you have no choice but to rent.
If your credit score is not high enough, you might end up with a higher interest rate that will make the mortgage more expensive and difficult to pay off. The interest rate, as well as other terms and conditions, are crucial since you will have to live with these for the next 3 decades.
If you have a score in the 600s, then it might be better to work on improving your score first because the interest rate will be lower if you break into the 700s. It is worth spending a few months on fixing your credit score so that you get a good deal on your mortgage that will last 3 decades.
6. What Costs Will I Incur as a Homeowner?
You should take all homeownership costs into account to determine if your finances can handle them all. Besides paying back the mortgage with interest, you will have to pay utility installation costs, homeowner’s association fees, yearly maintenance that can range from 1% to 3% of your home value, property taxes and insurance.
You can avoid all of these costs by renting. If you can’t pay for these expenses, then home buying is not for you.
Buying or renting depends on several factors that you must consider in order to make an informed decision. To buy a home, you need high financial stability to pay the monthly amount on your mortgage. If you can’t afford it, then you might have to resort to renting.
About the author
Harcourts Carlingford are real estate agents in Carlingford, we cover all aspects of real estate from residential sales, auctions, property management and commercial leasing and have a proven track record of success.