Deciding whether to buy or rent a home can be one of the biggest existential crisis you encounter in your life. Just ask Rami Sabanegh of Sacramento.
After 14 years of renting, Sabanegh became frustrated with paying high rents and began weighing the purchase of a home.
“I felt like I was throwing my money away,” said Sabanegh, 33. “Also, when you rent, you don’t have privacy.”
When Sabanegh and his wife found out they were expecting a baby, that further prompted them to pursue homeownership. “I wanted to have a home for him to grow up in,” Sabanegh said.
Sabanegh worked with broker associate Elizabeth Weintraub at Lyon Real Estate in Sacramento, CA. After a nearly one-year search, the Sabaneghs bought a house in Sacramento. Sabanegh lives there with his wife, Jackie, and their son, Andre.
Sabanegh views the purchase as an investment. “I know down the road in five or six years, if I do sell, I’ll get some of my money back,” he said. “I’m not throwing my money away. And the economy is now a little better.”
Rami Sabanegh with his wife, Jackie, and their son, Andre.
Weintraub said it generally makes more sense to buy because today’s down-payment requirements and interest rates are low. However, some financial reasons may point toward renting, such as living in an area where rents are substantially lower than mortgage costs.
“A lot of beach areas are like that,” Weintraub said. “Some large metropolitan cities are like that where it’s just so expensive to own.”
Also, people who are relocating and are uncertain about where they’d like to put down roots may initially want to rent. Weintraub advises renting for six months to a year to get a feel for the neighborhoods in your new locale.
“You don’t want to jump into homeownership in a neighborhood you don’t know. If you make the wrong decision, you can’t get out of it,” she said.
Weintraub said renting also is good option if you don’t plan to stay in a city for any length of time. “It might not make sense for you to buy,” she said, “unless you’re comfortable in being a landlord and renting it out if you move away.”
How Long Do You Plan to Stay?
Rob Mehta agrees that the most important factor in deciding whether to buy a home is how long you plan to live in the area. Mehta is director of strategic planning and business development at residential real estate company Coldwell Banker Burnet in Edina, MN. He said it’s best to stay in a home for at least three to five years to recoup the cost of buying and to build home equity.
On the other hand, Mehta agrees that renting offers more flexibility. Mehta worked with a young couple looking at buying a home in the Twin Cities. Their long-term plan was to move to Denver, but when they decided to relocate within a year and a half, Mehta said it didn’t make sense to purchase, so they kept renting.
Do You Qualify for a Mortgage?
If you’re looking to be a homeowner, Mehta said you should find out as soon as possible whether you’re qualified to buy. It’s important to have a stable job history, a solid income, good credit and money set aside for a down payment.
Potential buyers can use a rent-vs.-buy calculator to crunch the numbers. The New York Times offers a web-based calculator to compare the costs.
No matter how do you do the math, Mehta said you should beware of all of the costs, not just the mortgage payment.
“Hopefully, people are taking a look at the big picture saying, ‘OK, my principal and interest are this, but I still have taxes and insurance and utilities,’” he said. “Hopefully, they set aside a rainy day fund for repairs and those unexpected things that happen with the purchase of a property.”
Advantages of Ownership
When taking out a fixed-rate mortgage, buyers know what their payments will be for many years. There’s no landlord to raise the rent. Also, owners can do what they want with their property, like remodel or paint—things that typically are prohibited when you’re renting.
“Also, owning is putting roots down in a community,” Mehta said. “I think of it as you’re almost taking ownership of the community because you’re really invested in where you live versus renting where you’re more mobile.”
Dan Solin, a wealth adviser with Buckingham Asset Management and a New York Times bestselling author of the “Smartest” series of investment books, said he’s never met anyone who owned a home—and was building equity and paying off the mortgage—who was unhappy about the decision.
“The people who get into trouble are people who buy homes they can’t afford,” Solin said. “They put very little down, if anything, on the home and start taking equity out of the home. This isn’t an intelligent way to deal with your home. You should never do anything that puts your shelter at risk.”
Solin recommends putting down as much money as you can, securing a fixed-rate mortgage, working toward paying down the mortgage and not using “your equity as a piggy bank to pull money out.”
“Don’t leverage your home,” he said.
Owning: Not for Everyone
While many see homeownership as an investment, more Americans are choosing to rent because of the flexibility and amenities. They like having a landlord who takes care of repairs and yard work. They like that it’s simpler to move when they want.
“It really comes down to what makes most sense for you,” Mehta said.
Taking the Next Step
If you are currently renting you might often consider buying a new home when your lease is up each year, especially if your landlord keeps hitting you with rent increases. And if you can buy a home with a mortgage payment that is equal to or less than your monthly rent then why not?
You can study home prices in your area and use an online mortgage calculator to find payments that are similar to your current rent. This approach is a good way to get started, but it overlooks many of the hidden costs of homeownership including property taxes, closing costs, homeowners insurance, private mortgage insurance, utilities and maintenance costs. Just keep in mind that whatever you think the monthly cost will be, you should be prepared for it to cost a bit more.
The next step is to find a real estate agent to walk you through the costs of buying. If you are really ready to start home shopping then will likely need to get pre-approved for a mortgage. That means it is time to get your financial records in order, and hopefully your credit score is already up to par. If not, you might need to delay getting buying your new home until you can increase your credit score.
Same goes if you have a lot of student loan or credit card debt. You might need to keep renting until you pay those balances down. Of course it is hard to tell what you will get approved for before you try, just be aware that those items might work against you as they are common stumbling blocks for would be first-time homeowners.