Becoming a homeowner is an important financial milestone for many people. Take, for example, the 73 percent of 18- to 34-year-olds who recently told Trulia that it's part of their “American Dream.”
Here’s the thing: Buying a home is seriously expensive. In 2018, the cost of buying rose three times faster than the cost to rent, a 2018 Realtor.com report showed.
Translation: You need to be sure before you make what will likely be the largest purchase of your life.
So, if you’re deciding if you’re ready to own — or are just trying to convince your family you’re not throwing your money away by renting, here are eight times when it’s smarter to rent a home than to buy.
1. YOU MIGHT MOVE IN A FEW YEARS
Buying a home takes a lot of money — there's the down payment, of course, plus closing costs, insurance, property taxes, condo or homeowner’s association fees and, potentially, renovations and furnishings.
Selling a home has expenses, too, from capital gains taxes, escrow fees and moving costs to the listing agent’s fee (on average, 5 percent to 6 percent of the sale price).
One important consideration is your “breakeven point.” This is the point at which your home’s appreciation will offset those buying and selling costs. Typically, it takes between five and seven years to reach your breakeven point, so if you plan to move before that time, renting could be the smarter financial decision.
2. YOUR DESIRED HOUSING MARKET IS TOO HOT
If you’ve long been dreaming of living in a certain neighborhood but the housing market is overpriced, it’s best to wait until things cool off. Otherwise, getting caught in a bidding war can take your home budget to an uncomfortable place. And if you’re unable to put 20 percent down (the general rule of thumb for down payments), you’ll likely be required to pay private mortgage insurance (PMI) — an extra monthly fee that lenders charge to protect themselves in case you default on the loan.
PMI can range from about 0.3 percent to 1.15 percent of your home loan, depending on your loan size, credit score and loan term. Note: Once you gain at least 20 percent equity in your home you can stop paying PMI.
3. YOUR JOB IS UNSTABLE
Unlike with a rental, you can’t simply break a lease and move on if you’re a homeowner and your financial situation suddenly changes. Take an honest look at how secure your employment is. If you don’t have job stability— i.e., your company is doing poorly, you've heard whispers of layoffs — continuing to rent is a safer choice financially.
4. YOU ALREADY HAVE A GREAT DEAL ON RENT
If you found yourself a rental unicorn: amazing space, great area, bargain price, it can be financially savvy to stay put and invest the money you’re saving. First, calculate the difference between what you’re paying in rent versus what it would cost to own, then set up an automatic transfer to make sure you don’t spend those funds instead.
5. YOUR QUALITY OF LIFE WOULD SUFFER
Does finding a home in your price point mean moving to the ‘burbs and facing a lengthy and expensive commute? Will you be moving away from your family, friends or other support system? Are your mortgage payments leaving no room in your budget for enjoying the fun stuff? When you look at the full picture, you may find that, despite the general benefits of owning, renting is better for your quality of life.
6. YOUR CREDIT HAS SOME ISSUES
Ah, the almighty credit score. This three-digit number has a tremendous impact on your ability to qualify for a mortgage and nab a low interest rate. From a mortgage lender’s perspective, borrowers with higher credit scores are less likely to default on a mortgage, which is why lenders typically offer them lower rates (translation: You’ll pay less money over the life of your mortgage).
A perfect FICO score (the credit score used by most mortgage lenders) is 850, but generally you need at least a 620 to qualify for a conventional mortgage. FHA loans require a minimum credit score of 500, and VA loans require a minimum score of 620.
Don’t know your credit score? You can get a free estimate on FICO.com, Credit.com or CreditSesame.com. Several credit card companies also offer cardholders their score at no extra cost. If your score isn’t where you want to be, the good news is you can improve it; but in the meantime, renting may be your smartest option.
7. YOU'RE NOT PREPARED TO CLEAN GUTTERS
Owning a home has its perks: You can decorate it how you like, build the kitchen of your dreams and skip the yearly panic over your landlord raising rent. But there’s a less sexy side of homeownership, including lawn maintenance, snow removal and calling (and paying for) a plumber yourself when the sink starts leaking. As a renter, that all falls to your property manager; one phone call and voilà — headache solved. But as an owner, you're responsible for the maintenance of your home.
On average, homeowners should expect to spend at least 1 percent of their home’s value each year on repairs and general maintenance, a recent GOBankingRates survey found. So, if you paid $200,000 for a home, that comes to about $168 per month, or $2,016 annually. If you’re unable to set aside the extra funds, or are not ready for the added responsibility, it’s probably not the right time to buy.
8. YOU'RE NEW TO THE AREA
Just moved to town? Even if you’re financially ready to buy, it’s wise to rent at first so you can learn the area and find the neighborhood that’s the best fit for your lifestyle and finances. You'll want to take into consideration where home prices are rising, where the best school districts are (even if you don’t have or plan to have kids; it helps your resale value), your commute and other personal preferences, like whether there are nearby restaurants, stores or coffee shops.
Put simply, it makes more sense to rent while you’re getting your bearings. Then, once you have all the information, you'll know you’re making the best investment for your future.