Buying a house definitely has its upsides—you’re building equity, you could be paying less in monthly mortgage payments than in rent, and you can modify your house however you like. But if you don’t have a strong enough credit score or are trying to buy a house in an overvalued housing market, renting may be the better option. Here are seven instances when renting is better than buying.
1. You don’t have a strong credit score
A strong credit score is one of the biggest factors considered by lenders in the mortgage application process. To get the lowest interest rate on a mortgage, you’ll need a credit score of 760 or higher. Credit scores below 670 are typically considered subprime and can make it more challenging to get a mortgage, especially one with a competitive interest rate. If you have a lower credit score, you may still be able to get a mortgage, but you’ll likely have to shop around and have more cash on hand for a down payment.
2. You don’t have at least a 10% down payment
For many, especially for first-time home buyers, the biggest obstacle to purchasing a house is saving enough money for a down payment. According to Aaron Galvin, CEO and co-founder of Luxury Living Chicago Realty, “With a mortgage, you need to come up with a 10%–20% down [payment] and jump through hoops to secure lending. With a rental, as long as you have income, a strong credit score, and a clear criminal record, applying for an apartment is easy.”
According to Steven Gottlieb, real estate agent at Warburg Realty, “There are many savvy people in New York City, and if they feel that they can find a better investment than NYC real estate with that down payment money, then I don’t discourage them from making these investments and continuing to rent.”
If you don’t have at least 10% for a down payment, be prepared to pay significantly more in interest over the life of your loan.
Let’s run some quick numbers. Let’s say you want to purchase a $300,000 home. You take out a 30-year mortgage at 4.5%. Here’s what that could look like depending on the size of your down payment.
|Est. Monthly Payment
If you can save enough to put 20% down, you can save more than $37,000 in interest (over the option of 5% down).
Though your monthly mortgage payments may be lower than what you would be paying for rent, buying a house against a mortgage will increase your debt-to-income ratio, which could make it more difficult for you to borrow money for a student loan or car loan. In general, the lower the debt-to-income ratio (it’s recommended that this ratio be 43% to meet the requirements for a qualified mortgage), the better chance you’ll have at securing a loan or line of credit.
3. You don’t have a large enough cash cushion
Before you buy a house, make sure you can afford a mortgage alongside your current expenses and any emergencies that may arise. You should have reserve funds to cover repairs, furnishings, and other fees (like homeowners insurance, property taxes, utilities, etc.), as well as medical emergencies.
“If you own a home or condo, you’re responsible for maintaining the home, and that means [spending] your time and money,” says Galvin. And if you don’t have a home warranty to cover major system breakdowns, you’ll be left paying hundreds—sometimes thousands—of dollars in repairs.
It’s recommended that you have at least three to six months’ worth of living expenses saved up in cash to pay for these expenses.
According to Compass real estate agent Augusto Bittencourt, “There are many additional costs associated with buying a property such as closing costs and home improvements to take into consideration when purchasing. In fact, it’s estimated the average household will spend $14,206 on home improvements during their first two years of ownership.”
If you don’t have extra cash after a down payment and monthly mortgage payments, consider renting for a little while longer.
4. You don’t have enough money to buy what you actually want
If you’re too eager to buy, you may be settling for a house that falls short of personal expectations. Let’s say you prefer to live in a city—the entertainment, walkability, and energy it offers—but the suburbs fall more within your price range at the moment. If you choose to buy a house in the suburbs, you may be sacrificing the urban lifestyle you want. If you wait a few more years and plan carefully, you may be able to afford a home that provides the lifestyle you want.
5. You’re not sure where you’ll be in five years
“If you can’t see yourself living in the same place for the near future, then you probably don’t want to invest in a house or condo,” says Galvin. “If you’re renting an apartment and you accept a job offer across the country, you can usually sublet or buy out of your lease with minimal headache. You can move on to the next chapter of your life without becoming a landlord or putting your property up for sale.”
According to Michael Kelczewski, realtor with Brandywine Fine Properties Sotheby’s International Realty, “When you buy a house, the rule of thumb is that you stay in your house for five years or longer to provide the time to recoup your initial investment.” For example, if you own a home for 30 years, the closing costs will likely be offset by an increase in the home’s value. But if you own your house for only two years, there’s a much higher chance that the home’s value won’t have increased, meaning you’ll likely lose money on your investment. So if you’re not sure you’ll be in the same place in the next few years, renting will be much more conducive to your lifestyle.
6. Your housing market is overvalued
An overvalued housing market is one in which homes are priced at least 10% higher than the long-term standard, and local incomes are not expected to support those prices. In an overvalued housing market, it’s likely that buyers will be paying higher-than-normal prices and will have a harder time actually getting the house they want.
According to Nicolas Paredes, real estate agent at Warburg Realty, “With the monthly outlay of common charges and maintenance, the rising interest rates, and the cost of borrowing along with the risk that a property may not appreciate to a number previously expected, some buyers find it is better to rent and wait as they watch property values decrease to more appetizing prices.”
7. You’re shopping in a seller’s market
A seller’s market means that sellers have the upperhand over buyers. This typically means there aren’t enough homes to go around (inventory is low) because there are more buyers than sellers. Due to increased competition, buyers will have to act fast and bid high. The best time to buy a house is, of course, in a buyer’s market—when housing inventory is higher than the number of buyers. You’ll likely be able to buy a great home for a lower cost than you would in a seller’s market.
After considering these reasons, use a rent vs. buy calculator to help you evaluate the cost-effectiveness of each decision.
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