What to Consider When Deciding Whether to Buy or Rent a Home

The largest investment that you will likely make in your lifetime will come when you decide to purchase your first home. Owning a home can come with a lot of long-term benefits such as price appreciation, equity creation and having a stable place to call home. However, owning a home is also expensive and comes with some risks. If you are renting today and you’re thinking of buying your first home, here are a few things to think about before you pull the trigger.

Personal Lifestyle Considerations

When you’re thinking about buying, you should first consider your personal lifestyle. Renting is great for many people since it offers a lot of flexibility. Renting usually only requires committing to a lease for a year (and sometimes even less). When you buy a home, you’re buying an asset that requires a much longer commitment. There are also significant costs that go into closing on the eventual sale of your home. In most cases, it is recommended that you live in the purchased home for at least five years to fully offset these costs through appreciation and paying down your mortgage principle. If you intend to move sooner than that, renting is probably a better choice for now. Paying rent may feel like you’re throwing money away, but you’re paying for flexibility.

Financial Resources

When purchasing a home, you will need to have some form of a down payment. While first-time homebuyers can often purchase a home with as little as 3.5% down, these low-down payment mortgages can come with higher interest rates and private mortgage insurance (“PMI”). PMI is a premium you pay to cover the bank’s risk in the event that you are unable to pay your mortgage. To qualify for a conventional loan without PMI and with more favorable interest rates, you will need to have a down payment of closer to 20%.

In addition to the down payment, you’ll also want to have extra funds set aside to pay for closing costs, maintenance and unexpected repairs. Homeowners usually have additional bills that renters do not always pay. For example: the water bill, HOA dues, homeowner’s insurance, property taxes, and general maintenance & repair costs. For the typical property buyer, it would be a good idea to have at least twelve months of living expenses set aside after paying for all closing costs. This can help to ensure that you are able to cover an unexpected repair or handle other financial emergencies.

Know Your Credit Score

Most home buyers purchase their first home by getting a mortgage from a lender. When you apply for a loan, the lender will pull your credit report & score. Your credit rating has a major impact on whether you are approved for a loan as well as the interest rate you will get. You should start pulling your credit score at least a year before your desired purchase date. This could give you an opportunity to not only know your score but also make financial decisions that could improve it along the way by clearing past due accounts and paying down credit card balances. Having a strong credit score can lower the interest rate you qualify for, which can decrease your monthly mortgage payments. Simply put, you can save a lot of money with a strong credit score.

Deciding whether you should buy a home is a major life decision that requires proper consideration. By taking these factors into consideration, you will be better able to determine if now is the right time for you to purchase a home.

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