In the first half of 2023, borrowing costs priced out many prospective buyers and homeowners weren’t selling as current mortgage rates sit steady at 7%. But projections for the latter half of 2023 by industry leaders see mortgage rates potentially dropping — and homebuying thereby picking up as home prices fall and affordability improves.
Is that enough to give up your renting deal, though? There are three major factors to consider when it comes to deciding whether to buy or rent. Here are the top questions you need to ask yourself before shopping for a home.
Does Buying a Home Fit Your Life Goals?
While owning a property with a white picket fence has long been part of the proverbial American Dream, it can actually make it harder for you to reach other goals or attain other things that you might want down the line.
“You may have the money for a down payment and the monthly mortgage may fit your budget, but buying could decrease the availability of cash you have to fund your retirement or send your kids to college,” says Natalie Taylor, a certified financial planner in Santa Barbara, California. So just because you have the money, doesn’t necessarily mean you need to spend it on a house.
People who have thoughts about living in other places should also be wary of signing on to mortgages. Experts say it generally makes financial sense to purchase a property only if you’re sure that you’re staying put for at least five years.
“If you’re only going to be there for the short term, buying is a risky endeavor,” says Angela Moore, a certified financial planner in Miami. “When you sell, you’ll have to pay commissions to the real estate agent, among other costs.” Renting gives you more flexibility to come and go as you please and is less of a commitment. “Renting is like dating: You can break up anytime. When you buy, it’s like a marriage,” Moore adds.
Have You Saved Enough Money?
Before you even think about making a bid on a house, make sure your financial house is in order. This means having an emergency fund that totals between three and six months of your living expenses and being able to fund your retirement plan to the point where you’re at least meeting your employer’s match, if that option is available.
Keep in mind that the purchase price isn’t even close to all the money a homeowner will ultimately need to shell out. Prepare for closing costs, which can include things like fees for a lawyer and a broker, and a budget for nesting (you are going to need a new bed in that extra bedroom, right?). Depending on the size of your new property, that alone can range from $5,000 to upward of $50,000, says Taylor.
On the other hand, acquiring a home could actually help you save money. Nationally, renters spend 30% of their income on rent. But since costs outside urban areas are often lower, moving from downtown San Francisco to certain Bay Area suburbs, for example, could reduce that rent-to-income ratio down as low as 19%.
The cost of auto insurance is also typically much lower in the suburbs—which tend to have lower crime rates—when compared to cities. The average annual car insurance premium in Detroit, for instance, is roughly double that of the Michigan state average.
And don’t forget to factor in property taxes, health care and groceries, the prices of which all vary depending on where you choose to live.
Either way, create a new budget with your financial advisor to account for changed circumstances before making a bid on any property.
Will Owning a Home Be an Asset or a Hindrance?
While many Americans tend to look at their homes as assets, there is no guarantee. Moore, for instance, recalls buying a condo in 2005 and owing nearly $300,000 on it when the Great Recession of 2008 hit. She had to let it go for $96,000.
“Like any investment, profiting from real estate is not guaranteed,” she says. “When prices are going down, are you prepared to navigate through that?”
It may make sense, however, to think of any property purchase as an eventual contribution to your retirement costs. “If you pay off your mortgage, you’ll probably only have real estate taxes, insurance and maintenance to worry about,” says Taylor. And since paying rent or a mortgage is often the largest component of a woman’s budget, without it you can focus on building that retirement fund instead.
Furthermore, you get to factor in “imputed rent”—the money you save by effectively paying rent to yourself instead of to the owner of your building. Think about it this way: You’d have to pay to live somewhere and the monthly payments you make when you own a home go toward paying down your mortgage, not to a landlord. Homeowners can also save by deducting interest paid on a mortgage from their taxes, though this benefit has been curtailed in recent years, as well as the money they pay in property taxes.
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Katerina Ang is a freelance writer and former editor at Vogue Business and The Wall Street Journal.