Buying VS Renting
One of the most common questions that people who want to acquire real estate ask is ‘What is better? Buying or Renting?’. To put an end to this doubt that rises among most people, we will have a comprehensive overview of this topic.
Owning a home is a dream for many people in various parts of the world. However, there are some factors to consider before buying a property, which has been listed below.
You should always consider the cost of buying when compared to the cost of renting. A research was conducted in the 50 metropolitan areas in the United States, where it was found that owning a house is cheaper in 24 areas and renting a house is cheaper in 26 areas. For determining this, they’ve taken a fixed-rate mortgage at a 5% interest and a down payment of 5%. It is better to buy a house if you are living in the mid-west regions or the southern regions.
You should also consider your lifestyle because if you frequently travel to other countries (digital nomad lifestyle), it is better to opt for renting instead of buying.
The most important factor that needs to be considered before buying a property is the current financial situation. Only when you decide that your financial situation is good, you should proceed to buy a property. Why? Because there are certain requirements (regarding lenders) and criteria that should be met with. Some of the aspects that should be financially dealt with have been given below.
- Down payment:
In the majority of cases, people would opt for a mortgage loan to buy the property. In general, most lenders require an amount of at least 20% of the amount that is being secured. There is a possibility to acquire a loan as a first-time homebuyer, which is offered in the form of Federal Housing Administration loans. By doing so, you can only pay as little as 3.5% as a down payment.
However, if you opt for paying more money in the form of down payment, you can be granted a mortgage with low interest and save money. If you choose a little down payment option, you will end up paying a lot of money in the form of interest. Either way, a certain amount of money would be required to be paid as a down payment.
There should be some money kept aside so that you can be able to deal with any emergencies such as losing a job, unexpected medical procedures, etc. Even lenders might require such a thing to ensure that you can make payments regardless of such financial emergencies. According to a strategy, it is wise to have money set aside, which is at least 6 times your monthly expenditure. It would be even more beneficial to you if you kept something equal to 8 or 12 months.
- Debt-to-income Ratio:
Another major aspect that a lender would usually investigate is the debt-to-income ratio. This is nothing but the percentage of your monthly income, which is getting paid towards the loans and debts. For example, if you earn $5,000 and you are required to make a payment of $1,000 toward the loans you’ve secured, then the debt-to-income ratio is 20% ($1,000/$5,000). A DTI would be around 36% or less, which would increase the chances of getting a mortgage. A DTI above this percent would be considered somewhat risky and the chances of acquiring a mortgage become low.
- Credit score:
A credit score is crucial for acquiring a loan, where it is a mortgage or any other type of loan. Usually, a good credit score would increase the chances of acquiring a mortgage. Most lenders would require a credit score of at least 640, and when the score is more than 740, you can even acquire a mortgage with low interest rates. Now, let us look at the advantages and disadvantages involved with buying as well as renting.
Advantages of buying a house:
- The possibility of having an increase in the cost of your house is certain.
- All the payments you make are contributed to building equity.
- You can modify your house according to your likes and necessities.
- Some tax benefits
- It could be a place you can live for the rest of your life if that’s what you like.
Disadvantages of buying a house:
- If your financial situation gets worse and you won’t be able to make any payments towards your mortgage, then you might lose your house. Additionally, all the money that has been paid so far would also be wasted.
- As much as there is a chance for an increase in the cost of your house, there is a possibility for it to decrease as well (depending on the fluctuations in the economy).
- The responsibility of maintenance of the house is on you.
- There are various types of costs involved with buying a house, which includes home insurance, monthly payments, maintenance, property taxes, etc.
- You would have to stay in that place for a long time unless you can afford to lose a few bucks (actually, not a few).
Advantages of renting a house:
- The monthly rental price for a house is fixed and unpredictable.
- Renting a house is very beneficial, especially when you want to pack your stuff and relocate to another place.
- No additional costs are required such as those associated with buying a house.
- There is no requirement for saving a lot of money to deal with aspects such as down payment and other costs.
Disadvantages of renting a house:
- The money being paid in the form of rent doesn’t let you own anything.
- You will have very limited authority over the house and how it looks.
- There is a possibility for the rent to increase over a specific time period.
- You can’t stay there forever, even if you really wanted to.
Bottom line – If you have a good financial status, want to have more assets, want to have full power in the place you live, and wish to stay there for a long time, then buying a house would be considered a suitable option for you.
If you want to relocate a lot, don’t want to spend a lot of money on a house, and want to have a fixed cost of living, then you should go for renting a house. Having said that, we hope this article provided you with useful insight on the topic of buying vs renting.