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Should you keep renting or is it time to take the plunge into home ownership?
(The Associated Press)
Q:
Paying rent every month feels like throwing money away. Should I keep renting or buy a house?
A: I used to want to buy a house so I could have my own garden. Despite my sad track record of keeping plants alive, I wanted to be able to grow more fresh food on a fire escape than a few sad herbs. With my own house, too, I could try out all of the smart home renovation ideas I saw on HGTV, I thought, or hang art without randomly messing around at the end of my lease.
Ask Brianna
“Ask Brianna” is a Q&A column for 20 year olds or others starting out. I’m here to help you manage your money, find a job, and pay back student loans – all of the real things nobody taught us in college. Send your questions about postgraduate life to [email protected].
The leap from renting to owning is a big financial step, not just a lifestyle change. You need a potentially large down payment, solid credit, and a plan to live in the same place long enough for the purchase to be worth your time and money.
Three quarters of renters, ages 18-39, say owning a home is better than renting as it is a solid investment and protects you from rent increases. This is the result of the Fannie Mae National Housing Survey from May 2014. However, this only applies if you are financially secure enough to buy. For me that means that a garden has to wait. Here’s why.
You have to sit for a while: Sure, renting feels like “throwing money away”. But when your lease expires, you have the option to move to another neighborhood, get your own space with no roommates, or pack your belongings in a storage unit and travel the world.
Owning a home doesn’t bring that flexibility. Buying and selling a home is a complex, expensive process that includes closing costs and a brokerage commission, which when sold can be 5 or 6% of the property price. It generally only makes financial sense if you plan to stay for at least five years, says Leslie Ransom, a Chicago financial planner. You can’t always count on the value of your home to stay the same or increase, which means you can lose money selling soon after you buy it.
Renting may be a better option for you right now, and there’s nothing wrong with that – even if, following the American Dream, you think you wouldn’t have made it until you become a homeowner.
“What you need in a home is going to change,” says Ransom, especially if you are between 20 and 30 years old. Perhaps you are unsure whether you can cope with subzero winters in your city in the long term, or you may want to get closer to your parents as you get older. Perhaps once you get married and have kids, you will be desperate for more space and you’d rather wait until you can afford to buy a bigger place.
You need serious savings: Another important consideration should be the mammoth cost of buying and maintaining a home. A traditional down payment is 20% of the home price. The average price for existing properties hit a record high of $ 247,700 in June, according to the National Association of Realtors. So I’m not blaming you if your jaw drops on the idea of a $ 49,540 deposit.
Advice on the ideal amount of a deposit can be incredibly inconsistent. Programs aimed at first-time buyers through government agencies like the Federal Housing Administration and traditional banks allow you to pay a down payment of 3.5% or even less on your first home. In fact, the median down payment for millennial home buyers ages 18 to 35 was 7%, according to the National Association of Realtors’ Home Buyer and Seller Generation Trends report. You can also get help from state and local homeowner assistance programs.
However, it is in your best interests to pay as close to that 20% as possible. The higher the down payment you can make, the more financially secure you appear to lenders. You get a lower interest rate on your mortgage, which means a lower monthly payment. Additionally, you don’t need to get mortgage insurance to protect the lender in case you can’t repay the loan.
When looking for a down payment, you may also have trouble affording the ongoing costs of owning a home: repairs, property taxes, yard maintenance, homeowner insurance, and potentially a higher utility bill.
Find the average home prices in the area you might want to move to and use a rent and purchase calculator to see if the associated cost is worth the purchase. A home affordability calculator can show you the down payment you need in the area you are looking for. It is a bummer to have to wait to buy a home, but when you are financially ready, your tenant-to-home degree will be even sweeter.
Brianna McGurran works for NerdWallet, a personal finance website. Email: [email protected]. Twitter: @briannamcscribe.
The article Ask Brianna: Should I Keep Renting or Buy a House? originally appeared on NerdWallet.
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