Time for a new home? How to decide to rent or buy

Owning a home is a huge financial commitment, and it’s not for everyone. While property can be a long-term investment, it will require a big infusion of cash. Even then, there are no guarantees that it will appreciate as much or as quickly as you’d like. Before jumping in, take stock of your situation and weigh the pros and cons.

Take financial inventory

To decide whether renting or buying is the right choice, first consider your total financial picture. Calculate your income and expenses, making note of all debt, including student loans, auto loans and credit cards. If debt payments are a struggle, buying a house will only increase the pressure.

Some mortgage lenders use the 28/36 rule to decide if a borrower is a good risk. The rule assumes that any house-related payments should be no more than 28 percent of pre-tax income, and total debt should be no more than 36 percent. If you’re squared away with the 28/36 rule, then consider how much cash you have on hand for the down payment, closing costs and fees for inspections and moving.

After the up-front costs, decide if you’re prepared for a monthly mortgage payment that will include interest on the principal and escrow contributions, used to pay insurance and property taxes. If you can’t swing at least 20 percent down, factor in private mortgage insurance. You may also be on the hook for homeowner association fees, if they come with the neighborhood.

Beyond cash for home-related costs, you’ll want to ensure your emergency fund is flush. Aim for three to six months’ worth of living expenses in this dedicated account, and note that home ownership may demand a bump in your monthly calculations.

If this sounds like too much work, make it easy on yourself and speak to your local banker or home lender. They are professionals well versed in helping customers make these decisions and will help you decide if buying a home is right for you.

Pros and cons for Team Buyer

If you think you’re ready to join the ranks of homeowners, get to know the perks and drawbacks.

First, a monthly mortgage payment covers principal, interest and escrow. The more you pay toward principal, the more equity – or ownership – you’re building. The downside is that the balance, which can be significant, doesn’t contribute to your equity, as it is used for interest, taxes and insurance.

Additional financial benefits of ownership include tax advantages, as mortgage interest and property taxes may be deductible. If the home appreciates in value, you can cash in on the growth and be eligible to apply for other financial products like home equity lines of credit. In any case, know that tax laws change, so check with an advisor to see which rules and limits apply in claiming deductions or avoiding capital gains taxes.

As a homeowner, you have more flexibility when it comes to personalizing your home or making renovations, from painting the walls to updating a kitchen, complete with new appliances. Of course, if those appliances break down, you’ll be responsible for the repair. And you’ll be responsible for all maintenance work and costs, from the yard to the roof.

Pros and cons for Team Renter

As with buying a home, renting a place has its own set of advantages and disadvantages. Even if, financially speaking, you’re well positioned to buy, your living situation may be better suited to renting.

First, renting can offer far more flexibility than buying. When buying, it’s best to commit to a location for at least two or three years. Rental agreements are shorter-term in nature. If a career requires frequent moves or if wanderlust kicks in, it’s generally easier and cheaper to move on than to sell a home.

Second, if significant debt is an issue, renting provides some time to plan and get out from under it. Renting tends to be less expensive than owning a home, so you can work on whittling down debt and adding to savings. While you won’t be building equity with rent, you also won’t be shelling out for repairs or maintenance.

The up-front costs of getting into a place are lower when renting. Although you may need to cough up first and last months’ rent and a security deposit, it’s likely a fraction of the cost of a down payment on a house or condominium. But, you may experience some housing insecurity in the form of rent increases or condominium conversions.

Finally, you may need to get more creative about how to express your individuality in a rental. Some agreements are strict about painting and hanging items on walls, so read the fine print, especially if a security deposit is on the line.

Team Buyer or Team Renter?

Only you can know which path is best when choosing a new home. It may be tempting to purchase property if your local market is blistering hot for buyers, but don’t let market movements dictate one of the biggest financial decisions you may ever make. Take your time and research your decision to feel good about home sweet home.