All of these increased costs can decide whether to rent or buy an amazing enclosure.
“Buy now before mortgage rates go up, and start building stocks!” “Keep financial flexibility and keep entry and exit costs low!” A voice urging you to rent says.
There are arguments for “waiting for it to finish” until prices stop rising so quickly. But for most people, housing is not a discretionary need, but a necessity.
Ultimately, the decision comes down to where you live, your financial fitness, how long you plan to live in the home, and what your cash flow looks like. Here are some questions you can ask yourself to help you choose between buying and renting.
where do you live?
In more than half of the 50 largest U.S. cities, the monthly cost of buying a starter home was more expensive than renting a unit of the same size, according to For a report from Realtor.com released earlier this year.
But due to the rapid rise in housing prices, there are some areas where it is more affordable to rent than to buy.
Austin, Texas, for example, is the most advantageous place to rent rather than buy in January. New York followed. San Francisco; San Jose, California; Seattle. Boston. Denver. Rochester, New York; Portland, Oregon; and Los Angeles.
In these 10 cities, monthly payments associated with buying a starter home were 42% — or $978 — higher than rents, on average. Starter homes for sale in those locations included a higher average share of apartments than the national average, and higher-priced Homeowners Association fees.
Places where buying was more beneficial than renting included Birmingham, Alabama, where the cost of buying a starter home was 44.3% lower than the cost of renting in January. Cleveland, Pittsburgh, and St. Louis followed suit.
Two Florida cities – Tampa and Orlando – saw some of the fastest annual rental growth rates in January, making buying more attractive despite rising home prices and mortgage rates.
Are you financially fit?
The decision between renting or buying for most people isn’t so much about home prices or rents as about whether you’re ready to be a homeowner.
What does your savings look like after deducting the down payment? What is your credit score? Are you eligible for a mortgage? Can you make the monthly payments?
Andrew Dressel, a financial planner at Abundo Wealth in Minneapolis, people like to save six months of expenses in an emergency fund, $10,000 in cash to cover closing costs and transportation expenses, and a credit score of 720 or higher when looking to buy.
“Emergency savings are of great importance and the credit score of 720 has more wiggle room,” he said.
In addition, the total cost of owning a home—including mortgage, utilities, taxes, appliance and yard maintenance, and daily wear and tear expenses—must not exceed 40% of the person’s wages getting it home. He said.
“They also need to make sure they’re not sacrificing their retirement or other goals just to have a home now,” Dressel said.
How long will you live there?
If you plan to live somewhere for only two or three years, experts generally recommend renting.
If you’re feeling overwhelmed or impulsive buying in some frenetic market with low inventory, leasing isn’t a bad place to land if it’s only for a year or so, said Jay Apolofia, a certified financial planner with Lyon Financial.
He dismissed the sense of urgency felt by many potential buyers to secure mortgage rates before they rise, saying that interest rates and home prices often have an inverse relationship.
“When interest rates go down, that puts upward pressure on home prices,” he said. “Just because interest rates are low doesn’t mean it’s a good time to buy and higher interest rates doesn’t mean it’s a bad time to buy a home.”
But, Abu Sophia said, it’s always a good time to buy if you plan to stay there for a while.
Leonard Steinberg, a Compass agent in New York, said you should check yourself by asking if you’re too conservative about how much home you should buy.
“You have to be conservative enough that you can sleep and eat at night,” Steinberg said. “But a lot of people are very conservative.”
He said he often sees people buying homes that are too small, and after a few years, they realize the space just isn’t for them.
“They now have the buying and selling costs again,” he said, which includes closing costs, inspections and appraisals and real estate broker commissions. “Moving around is too expensive.”
What are your monthly payments?
As a homeowner, you will need to make the calculations about what your cash flow will look like with your monthly mortgage payments, the money needed up front to complete the transaction and the amount you’ll need to maintain.
There’s no sense in rushing home ownership before you can comfortably cover those costs, said Noah Damsky, certified financial analyst with Marina Wealth Advisors in Los Angeles.
Damsky recommends that your monthly mortgage payments not exceed 35% of your gross income. But this is the high end. Other models are more conservative and suggest 25%, in order to keep the debt-to-income ratio lower. An average recommendation would be to put no more than 28% of your total monthly income into your mortgage payment.
And while some potential buyers may be looking forward to the tax benefits of home ownership — including deducting mortgage interest, property tax payments and other expenses from their federal income tax bill — Damsky cautions not to overdo it.
“I try to temper their expectations by making it clear that tax benefits are often largely offset by a roughly 1% annual maintenance cost.”
And they should be warned: The out-of-pocket costs for home care can be more than that, said Matt Hillland, a financial planner at Arnold and Mote Wealth Management in Cedar Rapids, Iowa. Home buyers are advised to set aside 2% to 3% of the home’s value to cover maintenance costs.
“It’s important to make sure you find a monthly payment that you can afford,” Hyland said. “But don’t forget to add to those other expenses you’ll face as a homeowner.”