Looking back on my financial life 10 years ago I thought owning a home was a sign I had achieved one of the most important financial goals. Not only did it mean I had good enough income to afford a mortgage, insurance and property taxes, I had an investment I could watch grow for years and years. And I didn’t have to worry that my money was going towards rent versus towards an investment.
In retrospect, fulfilling the American dream might not have been the smartest decision I could have made at the time. Why? Well, I bought the house leaving my savings account completely empty and I still had student loans. Did I put 20% down and get a mortage for 15 years? Not quite. Rather, I got a 30 year mortgage and secured an FHA loan. That meant I didn’t exactly get into my house with a lot of equity, so I paid PMI (Private Mortgage Insurance).
Should owning a home still be a part of the American dream? Today’s market may say otherwise for many people. Here’s what an article at CNNMoney.com has to say:
In today’s weak housing market, ownership has ceased to be an investment vehicle that millions used to trade up into the houses of their dreams in the boom years. And it’s not an ATM machine for constant refinancing, either. Instead, for the past four years, ownership has been a culprit of distress. In June, one in every 411 housing units received a foreclosure filing, according to RealtyTrac Inc. Between 2006 and 2009, home prices fell more than 32%, according to the S&P/Case-Shiller Home Price Index.
Still think it’s a good idea to go out and buy that house you’ve always wanted? I don’t think buying a house is a bad idea, but I agree with a comment in the article that ownership should be looked at more closely versus the more common long-term ownership perspective. After all, it’s an expensive decision and you always need to look for ways to save money and control housing costs.
Should You Rent Or Buy A House?
Here are a few questions you need to answer before making the decision of when to rent or when to buy:
- Do you have at least 3-6 months in emergency savings? If not, I would suggest continuing to focus on this goal and not use it as a down payment on your house when you’ve saved this amount.
- How long do you plan to be in the house? Typically, you need to be in the house 5 years to recoup costs associated with the loan and closing.
- How much can you put down on your mortgage? 20% should be your goal.
- Do you have outstanding high interest credit card debt? If so, pay off your credit cards first!
- How much is rent going to cost in your area?
- Is your job situation stable?
- Do you have a budget? If not, you need to start budgeting.
- Do you know how much home you can afford? In other words, have you taken the time to determine what % your mortgage, property taxes and insurance are going to be of your net income?
- Do you know about all the extra costs associated with home ownership?
While it’s good to look at your answers to these questions you might also check out a couple of rent vs. buy calculators at the NY Times and Crown Financial Ministries.
As you can see, deciding to buy a house shouldn’t be a gut decision. It requires a lot of thought and answering tough questions. What other tips would you offer when considering buying or renting a house?
I think it completely depends on your individual situation, the market you are in, and what you’re buying. When I bought my first home (a condo), the cost (including taxes, insurance, PMI, and the association fee) was less than rent, so it made sense. Or at least it would have, had I continued to live in it with it mostly empty until I’d saved up the money to fix it up….
Did you also include mortgage interest in your calculation. Here in Houston when I add interest, taxes, insurance, PMI & HOA I save money by renting.
Peter Anderson says
I think it greatly depends on your situation, the market you live in, and where you’re headed in life.
When I was in college and shortly thereafter I was living with several roommates and saving money. At that time I was renting and I didn’t have the down payment for a house, the money to make payments or the need to put down roots quite yet.
When I finally got married a few years later the time was right for us to own a home. My wife had purchased her townhome with her parent’s help, and after living there for a few years, we decided to move up to something a bit larger. Thankfully we were in a good situation before we decided to do that with a large emergency fund saved up, a 20+% down payment and a family budget. Of course the one thing we didn’t completely anticipate were the miscellaneous costs of owning a home like association fees, maintenance, landscaping, etc.
Normally I would say the answer would be “own” no questions asked.
However, I currently owe about 95K on a home that might be worth half that.
I think its a whole new ballgame out there, and renting certainly has its advantages and built in protections
Financial Samurai says
Depending one one’s situation indeed.
If you can follow the 30/30/3 rule, I say buy now. Rates low, prices have come down, and you have to live somewhere.
Pareto FP says
I think that it completely depends on the circumstances of the person buying. In the UK, the property market is a strange place as there is no middle ground. First time buyers can’t really get on the ladder due to the extremely high deposits required so many are turning to “group investments” for renting, it’s probably the safest way at the moment for us.