Should You Buy Or Rent? Here Are 4 Things to Consider
NEW YORK (MainStreet) If you're a renter, you've probably heard you're throwing away money each month. Homeownership has been sold as the American dream, and in some cases it's a great decision.
If you're thinking of taking the plunge, make sure you consider the financial facts. Here's what you need to know.
One of the easiest ways to compare renting and buying is to calculate the rent ratio of a home. To do this, take the list price of the home you're considering buying, and divide it by the annual rent for similar properties. If the number is 15 or less, then buying is cheaper than renting. A rent ratio of 16-20 is a little gray, though renting will typically be better. If the rent ratio is over 21, no matter what people might tell you, you are better off renting than buying.
Let's say you're looking at an $800,000 house that rents for $42,000 a year, which is $3500 a month. That's a rent ratio of about 19, which falls in the gray area. So how do you decide if renting or buying is better for you? That's when it's time to look inward. And by inward I mean your savings account.
Do you have enough cash on hand for a 20% down payment, plus closing costs, plus an emergency fund for home maintenance or other unexpected expenses? No? Then work toward those goals before you make what will likely be the largest purchase of your life.
Equally important is your credit score. Many people don't realize how much power they have to improve their score in a short amount of time. Take a few months (or longer if need be) and get your score into the excellent range. I've seen multiple scores jump from the 500's to the low 700's in a matter of months. If you do this, you will save tens of thousands of dollars in interest in the long run.
As with any investment, you need to consider how long you plan to hold onto it. Popular wisdom used to assume that home ownership always led to a profit when it came time to sell. When in fact, historically, average housing values have only kept pace with inflationnot exactly an exciting return on your investment. And all those closing costs you paid? Well, if you're not planning to stay long enough to recoup those costs, then you can easily end up in the red when it comes time to selleven if the value of your home hasn't dropped.
--Written by Lauren Lyons Cole for MainStreet