If you have been trying to decide whether to buy or rent, you know there is no easy answer. The decision depends on a variety of personal factors, including your finances, geographic location, and life situation.
Before it became obvious we were in the midst of a housing bubble in 2007, conventional wisdom portrayed home-ownership as a sure-fire investment. Home values that were widely expected to continue rising and loose, plentiful credit clearly attracted many who were not really in a position to buy.
By now, people have become less likely to jump into a mortgage, but the last several months have generated new confusion. Lower prices may make buying look attractive, but concerns remain over whether the housing market has stabilised.
So, should you buy or rent? There are several questions you should ask yourself before committing to a mortgage. If any of these eight scenarios describes you, it could be prudent to err toward renting.
1. You are unsure how long you will be in the area
Rent until
you're sure you will settle somewhere for at least five years.
2. The price-to-rent ratio is too high
Divide the purchase price
by the annual rent you would pay to lease a comparable home. If the
ratio is close to 20 or higher, be wary. For context, the national
average in the United States during the 1970s, '80s, and '90s was
between 10 and 14 according to the New York Times, but the ratio remains
above 20 in many areas of the country after prices outpaced rents during
the past decade.
3. You're thinking about tapping your retirement savings
This
should be obvious, but if your retirement savings are the only way you
could make the down payment, you do not have enough savings to buy a
house. Set up a separate savings account.
4. You have credit card debt
Pay off your credit cards before
you think about buying a house. Paying off high-interest credit card
debt offers a guaranteed return that almost certainly beats the benefits
of home ownership.
5. You do not have an emergency savings account
You should have
money set aside to cover unexpected emergencies or job loss. Putting all
of your money into your home puts you at risk of not being able to cover
your payments in the event of an emergency.
6. The mortgage payment is too high relative to your income
Generally, your fixed housing costs, including monthly payments, taxes,
and insurance, should be no more than about 30% of your gross income. If
the percentage is too high, either look at less expensive properties or
rent.
7. You don't want to deal with maintenance
Basic upkeep requires
significant time and effort (and expenses) that your landlord would be
responsible for if you rented. If you lack either the time or
inclination to undertake home repairs, consider renting.
8. You think your life situation might change
Do you think you
might get married or have kids in the next several years? The property
that meets your needs now might not be a match in a few years.
There is no simple answer to whether you should buy or rent. Your responses to these questions should get you started, but passing this test does not necessarily mean you should buy. Several sites offer calculators that compute a response based on variables you enter. Check out the buy versus rent calculators at AllAgents.co.uk and the Times Online to help with your decision, but remember that these tools cannot fully capture your personal situation.
