Buying a home is part of the American Dream. But, at least from a financial perspective, that doesn't always mean it's the best move. If you're asking, "Should I buy a home or rent?" it's time to crunch the numbers. Ask yourself these questions.
Do I Have a Down Payment?
You can buy a home with a down payment as low as 3.5 percent if you get an FHA-backed mortgage, but there are a few things you should keep in mind.
- Mortgage insurance: With a small down payment, you need to purchase private mortgage insurance (PMI) to protect the lender in case you default when your home is worth less than your outstanding mortgage balance. The cost for insurance is up to 1 percent of your home's value, which works out to about $80 per month for every $100,000 you borrow.
- Monthly payments: The more you borrow, the higher your monthly payments will be. A lower down payment means you'll have less room in your budget to handle surprises.
- Interest charges: If you borrow more, you could end up paying more interest in three ways. First, the interest will be charged on a higher balance. Second, it may take you longer to pay off the loan. Third, your lender may charge a higher interest rate for larger loans.
Do I Have Additional Savings?
Although a higher down payment is usually better, you don't want to drain your savings to make a down payment. Even with a newer home, you never know when a major appliance will break or you'll need another big repair, like a new roof.
Additionally, you also need to be prepared for other life events. You should have a cushion so a job loss or hours cut doesn't immediately send you into foreclosure. Don't forget about other big bills like car repairs and medical expenses as well.
Finally, unless you're planning to live in an empty house, don't forget to set aside money for furniture and landscaping to avoid taking on credit card debt.
What's My Monthly Budget?
When setting a budget to decide whether to buy or rent, you need to think about more than a mortgage payment vs. a rent payment. Include the following in your budget for buying.
- Property taxes
- Homeowners' association dues
- Assessments for community improvements, such as sidewalks
- Routine repairs and maintenance, such as lawn mowing
- Increased utility costs
- Possible changes in your commuting expenses
- The need to set aside more money for major home repairs
Should I Buy a Home Now?
When you buy a home, you'll pay thousands of dollars in closing costs, inspection fees and taxes. These fees are small when compared to the total amount of your mortgage, but they can add up to about a year's worth of rent. If you quickly sell a home you just bought, you could lose these sunk costs with nothing to show for them.
You also risk losing money on the value of your home. While real estate prices generally rise over time, a down market within a few years after your original purchase can send your home's value below what you paid for it.
Buying a home should be a long-term investment. If you might change jobs, need a larger house for children or downsize when your kids go to college within the next five years, you may want to keep renting.
To learn more about whether it's a better move to buy vs. rent, visit our home center. We have financial calculators to help you crunch the numbers, or you can schedule an appointment with a loan advisor to discuss your goals in person.