With home prices stabilizing and housing becoming more attractive nationwide, renters may be questioning whether or not now is the time to buy. After all, property can be seen as an investment and rent is often viewed as “wasted” money.
On the other hand, there are some people today that are questioning the viability of homeownership as an investment. Stagnant growth in home values and weak housing demand have amplified this possibility for several years now. Those making that argument tend to overlook that housing payments not made towards homeownership are usually paid to a landlord with zero return, however.
Whatever your views are, deciding to buy a house is a largely personal decision that shouldn’t be dictated only by the whims of the financial markets. When asking yourself “should I buy a house”, you have to weigh the pros and cons of buying a home on your happiness and finances, present and future. Here are some considerations you need to factor into your decision.
1. Home Values and Rent Prices in Your Area
With average home prices jumping over 10% in 2013 compared to the previous year, the cost of purchasing a home should naturally be one of the first things you consider. Becoming a first-time home buyer isn’t easy to do on a limited cash flow because mortgage rules require applicants make a certain amount of money and have a limited amount of debt to be approved.
All this means that home prices and affordability play a huge role in deciding when, and if, you’re ready to buy a house. To make it work, you need to earn enough money to make your housing payments on-time and also have enough money saved for a down payment. We’ll get into that a little later.
Local housing rental costs also play a key part in deciding whether to rent or buy. People that rent homes are subject to all the conditions of their landlord, including rising rental rates. In some areas of the country, rental rates have risen so rapidly that 66% of renters recently surveyed said they’d buy a home if given the chance to avoid future rate increases.
2. Current Mortgage Interest Rates
When buying a home, it’s important to know that the mortgage interest rate you lock-in could save you (or cost you) tens of thousands of dollars and even make the difference in approval or denial of your loan application. Shopping around for the best mortgage offer ensures that you’re able to get the best rates and lowest monthly payments. Getting a low mortgage rate also enables you to afford more home.
The last few years have seen the lowest mortgage rates in history. While rates are still extremely low historically, they really only have one direction to go. The higher interest rates climb in the future, the less attractive buying a home may become so waiting could prove costly for buyers on the fence.
3. Your Savings Account Balance
While it may seem that buying is always the better option financially, it doesn’t always pan out that way. If you don’t have sufficient savings, renting can shield you from unexpected expenses that could bankrupt you if you lived in a house such as burst pipes or a dead furnace in January.
In order to own a home, you need to have a safety net of cash sitting in the bank. If you don’t have sufficient savings to make the down payment and keep a healthy emergency fund, you are likely not ready to buy unless the mortgage payment will be so tiny that you will be able to save a large amount rather quickly for emergencies.
4. Job Security and Contentment
The rent vs buy debate is often settled by taking an honest look at your job. If you have any reason to believe you may be downsized, fired outright, forced into an early retirement or moved to another office three states away at any point in the next ten years or so, buying is probably not a good idea. It takes time to build enough equity in a home that you will come out on top with a sale, unless the house appreciates rapidly. In this financial climate, that is a rare circumstance.
Your contentment with your job is also a factor. If you hope to switch positions or change careers all together in the near future, you may want to rent for awhile longer. A plum job offer may make moving a necessity, as can taking a different position within the same company. If you think a promotion is going to happen within the next few years, you may want to wait and buy once your income rises.
5. The Size of Your Family
Many single people buy a cute little two-bedroom house, only to meet the love of their life, marry and immediately start having children. Within a few years, the house is far too small and more is owed on it than a sale would raise.
In a similar turn of events, plenty of couples buy an enormous house only to divorce. This leaves them to either sell the house at a loss or one of them to live in and maintain a house that is far too large for their needs. Think carefully about your family size and how it could change in the near future before making a commitment.
6. Your Overall Investment Strategy
If you are uncomfortable with the idea that a house is not really an investment that is guaranteed to net a return, you should probably not buy a house. The housing bubble collapse proved that a house should be viewed as a stable, landlord-free, eviction-free place to live and to view it as an investment is to accept the risks involved. While it is indeed possible that you could reap a return if you buy and sell your home carefully, it is never guaranteed. Sometimes if buying a house would nix your plans for a better investment, such a contribution to a 401(k) or an IRA, you should either consider a less-expensive house or rent for the time being.
Buying a house is a deeply personal decision that hinges on questions only you can answer. By taking all of these issues into consideration, you can make the best decision possible for yourself and your family without regard to the present-day whims of the financial markets.
7. Potential Tax Deductions
One of most sizable financial advantages of buying a home is the ability to write off all the interest of your mortgage payments up to 1 million dollars. Considering that mortgage interest amounts to most of your housing payments for the majority of your mortgage’s duration, this can equal some serious cash back into your pocket.
There’s an array of other tax deductions that homeowners also enjoy including mortgage insurance, mortgage points, property taxes, energy efficient improvements, and use of your home for business. And if you live in a home for longer than two years, you can keep the profits tax-free up to $250,000. Renter’s don’t have access to the tax advantages that come along with homeownership. If you rent and use your home as an office, you may be able to take the home office deduction but there’s not much else available.
Like many other aspects of the renting vs. buying decision, these potential tax breaks fit into a larger, overall picture that involves various financial and personal considerations.