Those espousing the conventional wisdom of real estate will generally tell you that it is better to own a home than rent one – not only from a financial standpoint, but also in terms of personal stability. In a considerable number of cases the buying proponents are absolutely right: Younger parents with more than one child likely want the sense of grounding in a particular area that owning a house in a location with good schools and other amenities can provide. Buying also affords you the opportunity to build equity in the property that can be quite valuable down the line….though there is a risk of depreciation as well.
But every rule – including an unwritten dictum like this one – has exceptions. To aid in your efforts at deciding how exactly to go about acquiring your next home, let’s take a closer look at a handful of situations in which renting property would likely make a good deal more sense than owning.
According to Forbes contributor Camilo Maldonado, numerous real estate professionals state that you shouldn’t buy a home unless you’re going to live in it for five years or more. This is because the standard costs of home upkeep, including taxes, maintenance, insurance, utilities and other expenditures, will be greater than any equity you might have been able to build up in any shorter period of time.
If you work for a company that might reassign you to another one of its locations in the near future, or you’re thinking of trying out a role in a different city for better pay, you want the flexibility that renting affords. The same is true if you or your partner are applying to colleges and universities in places outside your current area. You don’t want to be caught in the flurry of trying to sell a house on short notice, as it’s much harder than finding a renter in a pinch.
NerdWallet pointed out that many loan officers at conventional lending institutions use what some call the “28/36 rule” to decide if you’re good to handle the mortgage on a particular home. Sound unfamiliar? This is just a way of determining debt-to-income ratio, which you’ve likely heard of before.
Mortgage payments, insurance premiums and property taxes should be no greater than 28% of your monthly pretax income.
Simultaneously, any other debts you hold (student loans, car payments, credit card bills and so on) should ideally equal less than 36% of the same income figure.
American student loan debt currently stands around $1.6 trillion, as cited by USA Today. In other words, a lot of people have a lot of it, including those whose remaining finances are well in order. But if you have significant debts of any kind, or know you’re not earning enough to keep monthly homeownership costs at a quarter or less of your pretax income, it’s probably best to stick to renting for the time being.
Buying and renting both come with upfront costs. But in most situations, the typical first and last month’s rent and security deposit it takes to secure an apartment will come out to much less than what a favorable down payment on a reasonably priced home will represent.
Most lenders hope for a 20% down payment. But what if you can only pay 10%? Truthfully, lenders will probably accept that if you have solid credit, income and other mitigating factors. But they’ll require you to take out mortgage insurance, which adds to monthly costs and might push you over the debt-to-income ratio into an unsustainable financial position. Unless you qualify for an FHA loan with a 3-5% down payment and fairly minuscule mortgage insurance costs, renting will be much wiser until you can save enough for a solid initial investment on a house.