When to Rent vs. Buy a Home

About a year ago I wrote a post titled, Home Series: Renting vs. Buying. I'd like to readdress the question, "Should I buy a house?" or "Is now a good time to buy a house?" These are questions I'm asked quite often. The housing market continues to recover and interest rates have stayed at historic lows. Therefore, buying a house might seem appealing. However, whether or not that is a good decision for you personally is an entirely different question.

Let's look at the trade-offs in more detail. Although the housing environment is more stable than it was a year ago (the U.S. Department of Housing and Urban Development provides statistics on the housing market), that doesn't mean that the fundamental questions you ask yourself about the decision to purchase a house will change. 

The idea here is not to get caught up in a trend. Purchasing a house is one of the biggest financial decisions most people will make. At the same time the choice is not just financial, it's also personal. We have a tendency to get drawn in, whether is by the media or talk amongst friends, and lose sight of our big picture. However, there are some things you can think about to make a decision that is right for you.

First you need to assess what you can afford. Will you be able to pay the mortgage, taxes, insurance and other expenses that come with maintaining that property? You'll want to assess your income, expenses and job stability. Also, an emergency account is important for anyone, however, it can give a homeowner extra peace of mind. The thought of not being able to pay a mortgage, being foreclosed upon and losing the house is more stress than most people want to deal with. Ask yourself, Is the purchase of a house a responsibility I'm ready to take on?  

How long will I live in the house? You may have heard the rule of thumb that if you will live in a house for five or more years you might consider buying. That way you have time to recover closing costs and the costs associated with selling the property. But don't plan on appreciation or expect your home to be a quick 'n' easy, money-making, five year investment. If you aren't sure how long you'll stick around or feel uncertain about the length of time in one spot, having the flexibility of renting might be a better option for you.

If you want to establish roots in a community and plan on being there for a while there can be psychological benefits to purchasing a house. Beyond establishing roots, it may give you a sense of pride or security, as well as the opportunity to put your stamp on your home and make it your own.

Is rent a waste of money? I've heard clients say, "they don't want to waste their money on rent." However, there is no guarantee that if you buy a house you'll have any more money in your pocket than if you rent. There might be an unexpected maintenance cost, or you could lose equity in your house if the housing market fails to perform. However, homeowners have the opportunity to gain equity. As I mentioned in the previous post, "Equity is the difference between the amount the house is worth and the money you put into it. You build equity as you pay off your mortgage, but you can lose equity if the price of the house declines. This becomes a concern if you want to sell or need to take equity out of the house. Under "normal" circumstances, this affects your net worth on paper, but likely won't have a "real" effect on you financially."

Ask yourself the questions above to think about your needs and life circumstances and use that as a starting place for decision making rather than letting market conditions or housing trends dictate a very personal decision.

This post was written by SaveUp's personal finance contributing writer, Catherine Hawley, CFP®.