When my wife and I bought our new home in 2006 we were moving from a neighborhood that was undergoing significant changes. Not only was the neighborhood starting to have more crime and lack of homeowner pride, we also discovered that there was a new 4 lane highway going in within throwing distance of where our townhouse sat. It was a scary prospect, and we didn't want to have to put up with the sounds of loud cars rushing by our house every day. So we decided to pack up and sell our house fast. The only question now was whether we would buy something right away, or whether we would rent.
In our culture home ownership has almost been deified, to the point where if you don't own your own home, something is wrong. You might say that some of that cult of home ownership also helped to bring about the recent real estate and economic meltdowns (remember how they were pushing home ownership on a whole lot of people who couldn't really afford it?). From CNN:
Modern America has long paired the “American Dream” with home ownership. The idea of staying put, paying property taxes and periodically mowing the lawn belonged to citizens who were somehow more American than the poor saps who could only afford to rent the place they called home.The notion isn't accidental. Ownership and the American Dream are deeply linked in government policies that favor mortgages over rent payments, dating back before Herbert Hoover was elected president in 1929.
While I still think that home ownership is in many cases a good thing and can be a blessing, if you're not careful it can also become a curse. You need to make a careful examination of the facts in your own situation before you jump headlong into purchasing a home.
Questions To Ask Before You Rent Or Buy A House
Some things you might want to consider before making a decision on whether to buy or rent:
- Do you have a nice emergency cushion saved up? At our house this meant having at least 3-6 months of expenses saved up – that would not be used for a down payment. That would need to be saved separately.
- Do you plan on being in the house for more than a few years? In most cases you would probably need to be in the house for at least 5 years to break even with costs associated with the loan and closing.
- Are you able to put down a sizable down payment? 20% is a good goal to have because it can help you to avoid paying private mortgage insurance.
- Do you have any outstanding debts – especially high interest credit card debt? Pay that debt off first!
- If you were to rent, how much would it cost in your area? Is it enough less than buying after added ownership costs that it will be worth your while?
- Do you expect to be downsized or let go any time soon? Is your job stable?
- Have you put together a zero based budget, and determined what your cash flow plan is?
- Do you know how much of a home you can afford? Dave Ramsey suggests not buying a home more than 25% of your income.
- Do you feel you understand the complete costs of home ownership? Don't forget all the fees, property taxes, association dues, etc.
Another good resource for helping you to make a decision on whether to rent or buy are rent vs. buy calculators like the one found at dinkytown.net or the New York Times: Rent Vs. Buy Calculator vs. Rent Vs. Buy Calculator
Buying a new home is a huge decision, it will be one of the biggest purchases you probably ever make. It will pay to carefully weigh your options and ask yourself all of the important questions before you just jump into something. If you don't, the homebuying blessing can quickly turn into a curse. Remember, there is absolutely nothing wrong with renting, and for many people renting is actually the better choice.
What do you think about renting a home instead of buying? Have you ever made the choice to rent instead because it seemed to be the more logical choice? Have you ever bought a home and regretted it later? Tell us your thoughts in the comments.