Should You buy a House Now...or Keep Renting?
According to the latest census data, the current home ownership rates sits at about 64.7%,. As Americans, we have not seen this number so high since 2009 (1). While the data seems to point us towards homeownership as most desirable, is it really better than renting? Well the short answer to that is, it depends. Should you buy a house now or keep renting is a common debate that depends on a number of factors. So, before you go running to get pre-approved for a mortgage, let’s consider some of these factors that will help you determine if you should buy a house now.
The length of time you plan to be in this home
Probably the most important factor (at least in my opinion) is how long you plan on staying at this residence. Typically, you should plan to stay in your home for at least 5-6 years if you plan on buying. There are several costs associated with buying vs. renting and forfeiting these costs for a short period of time may not make much financial sense. Let’s explore some of these costs.
Below is an example of the costs associated with purchasing a 1 BR Cooperative in New York City
- Price: $370,000
- Down payment (20%): $74,000
- Interest Rate: 3.875%/30 year fixed
- Monthly mortgage payment: $1,391
- Monthly maintenance fee: $784
With these assumptions, it costs about $2,175 a month to live in this newly purchased CO-OP, a price that’s fairly comparable to local rent for similar units.
However, let’s not forget about some additional expenses:
- Renovations: Let’s assume this unit has an outdated kitchen. The average renovation in New York can cost upwards of $40,000. While it’s a one time cost, it adds to the length of time you need to stay in the home to break even.
- Homeowners insurance: On average, homeowners insurance is about $1,500 but can vary widely depending on the value of your home.
- Legal fees and Closing Costs: You definitely want to hire a lawyer to help you with the home buying process which can cost north of $1,000 depending on his/her involvement. In addition, closing costs can range between 2-5% of the home value.
There are some great free calculators out there that allow you to compare renting vs. buying purely from a monetary POV. Understanding the financial implications will play a big role in whether you should buy a house now.
How much cash you have at your disposal
As I mentioned above, purchasing a home is much more than just a down payment which usually range anywhere from 3-20% of the purchase price depending on your qualifiers and the rules of the seller. Even if you’re able to get away with a low down- payment (in my book that’s anything less than 10%), I don’t recommend it. Putting down less on the home will save you cash upfront, but will ultimately cost you more in interest in the long-run. Additionally, in some cases, you need to have an additional 12-24 months’ worth of monthly payments in the bank. Read the cash requirement carefully-you may feel that buying is forcing you to be too liquid and that money is best spent on other investments.
Your lifestyle and other financial goals
If setting up roots and building a home with your own personal touches is important, then buying vs. renting might be better for you. However, if you’re counting on a promotion that takes you to another part of the country, renting is probably a better option for right now. Keep in mind, renting allows you flexibility to be more nomadic. If you buy a home and need to move, you may be limited on your subletting opportunities (especially if you buy in a coop).
Additionally, think about your other financial goals. Are you looking to get married or go back to school or buy a new car? These are all major purchases that will require you to either hold on to cash or take on new debt, increasing your debt to income ratio. Prioritize your short and long-term financial goals before making the decision to buy to make sure you’re spending that money on what matters most.
There is no single way to decide should you buy a house now.. Buying a home is a huge decision and one that should not be taken lightly. If you’re still unsure, schedule time with a lender or an attorney to review some of the potential costs and pros/cons.
For more information on the home buying process, check out our post on the First Tie Home Buyer’s Guid
(1) US Census Bureau 2020 Quarterly Residential Vacancies and Home Ownership https://www.census.gov/housing/hvs/files/currenthvspress.pdf