There's no way around it. Housing is expensive these days. And deciding whether it's smarter to rent or buy a house is a complicated decision. You're probably wondering:
Which option is (at least a little) less expensive?
Can I even qualify to buy my own place?
How much down payment do I need to buy a house?
Well, the short answer is it depends. The amount of time you plan to stay in a home should probably be the largest factor in your decision. Then, there's the down payment, your credit score, and where you want to live. Read on for the facts, numbers, and some insider tips so you can decide whether to buy a home or keep renting.
Is It Smarter to Rent or Buy?
If both renting and buying didn't have their upsides, we'd all be wasting our time here. But, wasting time we are not. Both options provide benefits. In general:
Renting a Place Benefits
- Flexibility: It's easier to move without long-term commitments.
- Lower upfront costs: Renting usually requires a security deposit and the first month's rent. This tends to be a significantly smaller amount than a down payment and closing costs for a home purchase.
- Maintenance: When the plumbing goes awry or the dishwasher breaks, you can literally wash your hands of the problem while your landlord does the dirty work or pays someone else to do it.
- No property taxes: When you rent, you don't pay property taxes or homeowner's insurance.
Buying a Home Benefits
- Equity: Sure, home values fluctuate, but on the whole, property values increase. That means when you live in a home you own, it becomes more valuable than when you bought it. Homeownership is one of the most reliable investments a person can make.
- Stability: If you choose a fixed-rate mortgage loan, your monthly mortgage payment will remain the same unless you choose to refinance.
- Personalization: The freedom to customize your home goes beyond the ability to paint a wall neon orange or use a heavy-duty anchor hook for that giant shadow box from your mom. You'll know that investing in design and decor will provide long-term enjoyment. You might even gain extra home equity with some choice home updates!
Time. The Great Decider.
When it comes to making the decision between renting and buying, time will likely play the biggest role. Most experts will refer you to the concept of the breakeven horizon. Sounds pretty epic, right? The truth is, the breakeven horizon IS epic. It's the time when a homeowner has reached the point where all of the investments they've made in their home (the down payment, closing fees, real estate agent commissions, repairs, etc.) are balanced by the equity the home has gained. And from there, the average homeowner makes money on the deal.
In the early years of a mortgage, a large portion of your payments goes toward interest rather than principal, meaning you build equity slowly at first. However, the longer you stay, the more you pay down the principal and build equity. Real estate generally appreciates over time, and staying longer increases the likelihood of benefiting from this appreciation, potentially making a profit when you sell. Short-term market fluctuations can affect home values, but staying longer mitigates the risk of having to sell during a downturn.
So, when does the average homeowner reach their breakeven horizon? It depends on your down payment, interest rate, and some other factors, but recent estimates hover around 10 years in the Denver area.
From a practical standpoint, staying in one place allows you to establish roots, build relationships, and become part of the community. Owning a home gives you the freedom to make improvements and customizations that suit your lifestyle, which can be more rewarding if you plan to stay long-term. For personal and family planning, staying in one home provides stability and consistency for children in terms of schooling and social connections. It also makes sense if you have a stable job and foresee staying with the same employer or within the same region.
Long-term benefits include:
- Cost efficiency, as owning a home can be more cost-effective than renting over time.
- Mortgage payments can be fixed, while rents often increase.
- Homeowners can also take advantage of tax deductions on mortgage interest and property taxes.
- Over many years, paying down the mortgage and property appreciation can significantly increase your net worth, and owning a home can be a valuable asset to pass on to future generations.
In summary, buying a home is typically a better financial decision if you plan to live there for a long time because it allows you to spread out initial costs, build equity, benefit from market appreciation, and enjoy the stability and personalization that homeownership offers.
All that said, if you don't plan to sit and simmer in one place for 10 or more years, renting might be financially advantageous. And, you probably won't have to pay when the AC breaks either.
All the Other Home Purchase Numbers
Qualifying to buy a home can be a bit more challenging than qualifying to rent but not as challenging as you might think. No, you don't need to have a 20% down payment and you don't need a 650 credit score either! You could pay as little as 3% down (although you'll pay more in the long run) and have a credit score as low as 500, depending on the type of home loan you get. And there's a bonus to homeownership! If you make your mortgage payment on time every month, you'll be building your credit score AND your equity.
Another benefit of owning a home is that you'll stay current with housing market value. If home prices go up, your equity probably will too. If you rent, you just pay more and more each year without getting a thing out of it.
Ready to Buy a Home? Here's How to Get Started.
You already know how to rent a place. Go to a leasing office or contact a property owner, fill out a few forms, consent to a background check, pay your deposit, and you probably have keys in hand!
Buying a home is a different story. It's a big investment, which calls for thoughtful planning. So here's a quick guide on how to prepare for home-buying:
Assess Your Financial Situation
Start by reviewing your credit score. Checking your credit report and score is crucial, as a higher credit score can qualify you for better mortgage rates. Next, focus on saving for a down payment. Aim to save as much as you can at least 20% of the home's purchase price if you're set on avoiding private mortgage insurance (PMI) costs. Finally, create a budget to determine how much you can afford to spend on a house. A helpful way to think about this is to calculate what your monthly payment would be and then check that it fits into your monthly budget.
Understand the Costs
In addition to the down payment, you need to budget for closing costs, which can be 2-5% of the purchase price. It's essential to factor in these costs to avoid any financial surprises. You'll also want to consider your monthly expenses, including property taxes, homeowners insurance, maintenance, and utilities. Understanding these costs upfront will help you plan your finances more effectively and ensure you can afford your new home in the long run.
Research and Choose a Location
Take the time to research different neighborhoods to find one that fits your lifestyle and needs. Consider factors such as proximity to schools, work, public transportation, and amenities. Choosing the right location is essential for your long-term happiness and convenience. By thoroughly researching neighborhoods, you can ensure that you select an area that aligns with your preferences and daily routines.
Hire a Real Estate Agent
Look for an experienced real estate agent who specializes in helping first-time buyers and is familiar with your desired area. A knowledgeable agent can provide valuable insights and guide you through the home-buying process. Don't hesitate to ask questions and use your agent as a resource for understanding the buying process and negotiating offers. Their expertise can help you make informed decisions and find the right home for you.
Get Pre-Approved for a Mortgage
Begin by finding a mortgage professional you can trust. Get referrals from your real estate agent and your trusted circle. You can also take to the internet and browse reviews. Since this is such a big purchase, it's worth comparing 2 or 3 home loan estimates to find the right one for you. Then, you'll want to get a mortgage pre-approval. This step is crucial as it helps you understand how much you can borrow and shows sellers that you are a serious buyer. A pre-approval letter can give you a competitive edge in a competitive housing market.
Start House Hunting
Let the fun begin! Your real estate agent will help you select homes that are in your budget and your desired areas. And remember to be flexible. You might not find a home with the exact cabinets you've been dreaming of, but that can come later. Focus on the number of rooms you need, the location that fits your lifestyle, and any other NEEDS you've identified.
To Be (a Homeowner) or Not to Be (a Homeowner)?
So, is it smarter to rent or buy a home? We know it depends might not be the clear-cut answer you were hoping for. But when is something so important ever that straight-forward? It's a big decision that requires thought and some number crunching. So, connect with a homebuying team to see if you're ready. A reliable real estate agent and mortgage professional can help you sift through the housing noise and compare some hard figures. And if you're not ready to buy? No worries! Corcoran Perry & Co. has a great leasing team too.
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