The decision to rent or buy a home has always been a significant financial consideration. However, whether to rent or buy is a particularly hot topic right now, given a booming real estate market, new mortgage interest deduction limits, and a rising mortgage interest rate environment.
It doesn’t matter if you’re a Millennial thinking of buying your first home, a professional relocating for work, or a retiree downsizing to a condo or apartment: The own-or-rent decision is a complex one, influenced by a host of factors. SageVest Wealth Management offers tips and insights about renting versus buying.
How Might Rising Mortgage Rates Impact My Real Estate Decision?
As a prospective buyer, the recent rise in interest rates might have you questioning how higher mortgage rates could impact housing affordability. If we’re truly entering an inflationary period, locking in your housing costs with a fixed-rate mortgage before rates move any higher is a strong plus in favor of buying a home rather than renting.
How Long Do I Plan To Stay In My Home?
One of the strongest factors in the decision to rent or buy is how long you plan to own the property. We typically only recommend buying if you foresee yourself living in your home for at least 5-10 years.
Buying and selling a house entails significant costs, typically around 10% of the property’s value. This means your property must appreciate by at least 10% just to break even. The less time you live there, the less time there is to achieve that growth. Staying longer balances those costs over more years.
Your home value is also more susceptible to market conditions in the short-term and could even decline in value e.g., if a rapid rise in mortgage interest rates and/or new mortgage interest deduction limits negatively impact housing prices.
What Life Changes Could Impact My Decision To Rent Versus Buy?
Your decision to rent or buy a home is also influenced by your current lifestyle and potential future life changes. Common considerations include:
Relocating
Whatever your reasons for relocating – work, relationships, a lifestyle change, or other – we recommend you rent first. This ensures you like the new environment before making a significant financial commitment.
Family Proximity
Despite families being more geographically dispersed today, we commonly see people moving closer to family at various stages in life, such as when children and grandchildren are born, or as parents age. Take stock of the location you’re considering, relative to family proximity. If family dynamics may change in the near future, renting may be wiser.
Starting Or Expanding Your Family
Your home may need to grow with your family. Think carefully about a home’s suitability for little ones, particularly before making a house purchase as an unwise decision could prove costly.
Downsizing
Particularly as people age, they often seek a simpler and easier lifestyle. Your decision to rent or buy a home could vary, depending on your age. If you’re younger, you hopefully have a long horizon ahead, making home ownership more sensible. Buying a home helps to offset any rent inflation impacts, and secures ownership of an asset for long-term needs, such as moving to a retirement community. Conversely, if you’re in your mid-80s onwards, or in poor health, renting gives you greater flexibility should your health and housing needs necessitate a move.
Can I Afford A Down Payment?
If a house purchase seems most appropriate, you’ll need to decide how much you can afford, including how much you need to accrue as a down payment.
Down payments should typically be at least 20% of the purchase price, with extra cash on hand for closing costs, moving expenses, home updates, and more. There are alternatives to a 20% down payment, such as a home equity loan or a Federal Housing Administration (FHA) loan (where the down payment can be as low as 3.5%). While a lower down payment might be attractive, you need to be cognizant of potential costs, such as:
Home Equity Loan (Second Loan) Interest Rate Risk
Home equity loans often have variable rates, meaning the rate can increase if interest rates continue to climb.
Private Mortgage Insurance (PMI) Fees
If your down payment is less than 20%, PMI might be required to secure a conventional loan. PMI fees vary, but generally range from 0.3% to 1.5% of the original loan amount per year. PMI costs are removed when your outstanding loan balance drops to 78% of the home’s original value.
FHA Mortgage Insurance & Premium Fees
There are two parts to FHA mortgage insurance premiums: an initial fee of 1.75% of the loan amount, plus an annual fee that varies from 0.45-0.85%, depending upon the terms of the loan. The annual fee continues for the life of the loan, even if your equity exceeds 20%.
If you choose to rent rather than buy, be sure to invest the money you’d otherwise direct towards a down payment into your portfolio instead.
Am I Ready To Be A Home Owner?
Finally, it’s important to evaluate your interest in home ownership and your financial capability to support it. Your home may become your most significant asset. It demands upkeep and maintenance, requiring time and money, in order to maintain its value. If you’re on the fence, consider renting. A condo perhaps offers a lower maintenance option – but remember to factor monthly condo fees (plus potential special assessment fees) into your budget.
SageVest Wealth Management understands the significance of housing decisions, relative to life enjoyment and finances. Please contact us to learn more about how we can help you make the best housing decision for you.
