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August 2011

Should I buy or rent a house?

From articles in respected financial journals to spots on late-night television, real estate hawkers and investment gurus have touted the benefits of homeownership. "Don't throw your money away on rent," they admonish. "Interest rates are headed up. Now's the time to buy." "After all," they suggest, "buying a house is a surefire way to build wealth."

Unfortunately, millions of Americans whose homes are now in foreclosure have learned — the hard way — that in the real world, nothing is surefire. While it's true that buying a house has been a great way to build wealth for many people, homeownership isn't for everyone. For some folks, continuing to rent an apartment or house may be the wiser choice. Renting isn't always a bad idea.

Here are three questions to consider when evaluating whether to rent or to buy a home.

  • How long will I live there? If flexibility is an important consideration, think twice before taking on a mortgage. As a rule of thumb, expect to live in a home for at least five years to break even. Of course that calculation depends on the term of the mortgage, closing costs, and the size of your down payment. But if your short-term plans include moving — even across town — renting may be a better option.
  • How much can I offer as a down payment? If at all possible, you want to avoid the requirement for private mortgage insurance or PMI. To get that break, you'll need a down payment of at least 20% of the purchase price. If that percentage isn't feasible for you, shoot for a down payment of at least 10%. The higher the down payment, the smaller the mortgage, the faster you build equity.
  • Can I afford the monthly payments? Some lenders, especially prior to the housing meltdown of 2008, were notorious for offering mortgages at the very limits (and sometimes beyond) of a family's ability to pay. If you're considering homeownership, take a hard look at whether you can cover the costs — month in and month out — of mortgage principal and interest, utilities, maintenance, taxes, insurance, and all the other costs for which you'll be responsible. In general, expect about 80% of your monthly payments to cover interest alone in the first five years of a 30-year fixed rate mortgage. That's money you'll never see again, like rent.


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