What to Know About Buying vs Renting and When to Take Action
If you’re ready to move, but you’re not sure if you want to buy or rent your next home, this post is for you. We will cover the costs of buying vs renting, as well as the advantages and disadvantages of renting or owning your home. Finally, we will talk about how you know it’s the right time to buy and what steps you should take.
What are the Primary Costs of Buying and Owning Your Own Home?
If you’re going to buy your own home, there are many costs associated with this. This section will go over the main costs that you’ll encounter when you’re buying your home.
- Down Payment. Your down payment is a percent of the home’s listed price that you pay upfront. This percentage can range from 3.5 percent up to 20 percent based on your mortgage loan type, market, and credit score.
- Home Appraisal. An appraisal is done to make sure the home’s listed price matches the home’s value. This price ranges anywhere from $300 to $500.
- Home Inspection. An inspection will be performed by a licensed home inspector. They will be looking for any potential problems that the home buyer may have missed on their walk through like a cracked foundation, or leaks in the roof. This can cost from $300 to $500.
- Property Taxes. You could be responsible for anywhere from six months of property taxes before moving in, but this depends on your area and the time of year.
- Loan Payments and Insurance. You’ll pay loan payments and insurance each month. The Homeowners and Renters Insurance Institute estimated this to be around $1,034 for insurance alone annually.
- Upkeep. As a homeowner, you will be responsible for all of the maintenance and upkeep around your house once you purchase it.
What are the Advantages and Disadvantages of Buying a House?
When you purchase a house, several advantages and disadvantages come with this process. This section will talk about both of them when it pertains to buying your home.
- Builds Equity Over a Period of Time
- Easier to Develop Relationships with Your Community
- Freedom to Customize the Home to Your Tastes
- Potential for Additional Income from Renting the Property
- Tax Benefits like the Homestead Exemption and Federal Tax Deductions
- High Upfront Cost to the Buyer
- Most Homes Won’t Come Furnished
- Potential for Financial Loss
- Responsible for Upkeep and Maintenance
What are the Primary Costs of Renting a Home?
If you plan to rent a home, there are a few costs the come along with it as well.
- First Month’s Rent. Renters are usually required to pay first month’s rent upfront.
- Nonrefundable Deposit. You may be charged a nonrefundable deposit ranging from $100 to $500 depending on your landlord’s preference.
- Pet Rent. A lot of landlords will add on extra rent costs if you own a pet. These additional costs can range from an extra $10 a month up to $100 or more.
- Renter’s Insurance. Many states require renters to have renter’s insurance to protect against any lost valuables. The average cost is $15 per month.
- Security Deposit. Most landlords require a security deposit prior to moving in. This acts as insurance against damage, broken leases, and late rent.
- Utilities. Most renters have to pay monthly utilities on top of their monthly rent expenses. These costs vary by usage.
What are the Advantages and Disadvantages of Renting a House?
When you decide to rent a house, you get a few advantages and a few disadvantages with this process. This section will talk about a few of those in relation to renting your next home.
- Credit Requirements Don’t Factor in as Much
- Landlord Will Do Maintenance and Repairs
- The Relocation Process is Easier
- Some Utilities May Be Included in Your Rent
- You’re Not Exposed to the Real Estate Market
- Limited Control Over the Rent Price Increasing
- Limited Guaranteed Housing Security
- No Chance to Build Equity
- No Federal Tax Benefits Available
How Do You Know When It’s the Right Time to Purchase a House?
The first thing you should look at is how much you’ll spend each month vs. what you’re currently paying in rent fees. This calculator is a tool that can help you factor in all of the costs and see where it stacks up to your current setting. You should also consider taking these next five points into consideration before you buy your house.
1. Are Your Finances in Order? You want to know how much debt you have. This includes credit card debt, student loan debt, or personal loans. Your bank will look at these factors when they’re deciding if they will give you a mortgage loan or not. If your finances aren’t in order, it’s smarter to wait and pay down your existing debt first.
2. Is Your Credit Score High Enough? You want your credit score to be at least in the mid-700s if not higher before you apply for a mortgage. The higher your score is, the better your interest rate will be. If it’s not, take the time to boost your credit score before you apply. You can check your credit score for free at annualcreditreport.com.
3. Can You Afford Your Down Payment and the Associated Fees? You will want to have enough money saved to cover your down payment, insurance, closing costs, taxes, and any fixing up your new home you have to do. This can easily be in the thousands of dollars.
4. Can You Comfortably Afford Your Monthly Payment. You want to be able to afford your monthly mortgage payment and still have money left over. You should carefully calculate your monthly costs, and see how that compares to your income. If you can’t afford it, or if it will be extremely tight, it’s probably a good idea to wait.
5. Are You Sure You’re Ready to Settle Down? You want to be sure the area you’re purchasing your new home in is an area you want to stay in for a period of time. You don’t want to buy your home and then find an amazing work opportunity two or three hours away. A good rule of thumb is to plan to stay in your house for the next five years at least. If you can’t do this, you should probably hold off on buying.
What Steps Do I Have to Take to Buy a House?
If you’ve read this post and you’ve confirmed you’re ready to buy your house, this section is for you. We will go through the step-by-step process to the purchase of a home.
The first thing a potential home buyer should do is enlist a realtor to help them. A realtor will know the market and the area that they are looking for usually much better than the potential buyer. They will also be able to assist you with the paperwork aspect of the home buying process.
The second step is to get pre-approved for a mortgage. It doesn’t make sense to look for a house if you have no idea what you’ll be able to afford. It is a good idea to set up an appointment with a mortgage lender right away. That way you’ll be able to give your realtor an estimate of how much home you can afford.
The next step is to go out and look at homes. You can research and pick out potential homes, and give your realtor specifications you want and they’ll compile a list as well. Once you’ve found a home you like, secure financing. This cost will usually be higher than the home’s listed price because it factors in closing costs, insurance, and miscellaneous fees.
As soon as you choose a house and have the financing, make an offer. The person or institution you’re buying the house from will usually respond quickly. They will either accept, reject, or counter your original offer. You can either accept this new offer, reject it, or offer another price.
When all of this is done, look into purchasing home owner’s insurance. You want your valuables and your home to be protected, and this insurance will do this for you. The final step in the home buying process is closing. This is where both parties have agreed on a price, money has been exchanged, and the new home owner has the keys.
This post has gone over the costs associated with buying vs renting. We also talked about the advantages and disadvantages of both. We touched on how you make sure you’re ready to purchase a home, and we finished with the home buying process. Buying a home should be an exciting time in anyone’s life, and as long as you’re financially ready, you should have success in this endeavor.