Should You Buy a Home?

Buying and owning a home is almost always a better financial decision than renting. Yet buying a home isn’t always the right decision for everyone. So before you jump into the home-buying process, it’s a good idea first to figure out whether you should be buying a home at this time.

Renting vs. Buying

Renting and buying each have their own advantages.

Advantages of Renting

• Time: It usually takes less effort to find a place to rent than one to buy.
• Less responsibility: You’re not responsible for damage that results from everyday wear and tear.
• Personal flexibility: It’s usually easier and less expensive to break a lease than to get out of a mortgage.
• Financial flexibility: Since you typically pay just a deposit (and not a substantial down payment, as you would for a mortgage), your assets remain more liquid and accessible.

Advantages of Buying

• Investment: Homes can grow in value. Rent, once paid, is lost forever.
• Taxes: Mortgage interest is tax deductible, lowering payments.
• Stability: Fixed-rate mortgage payments never rise in cost, whereas rent can rise every year.
• Design flexibility: You’re completely free to renovate, remodel, or landscape your home however you like.

In short, if you need personal or financial flexibility, don’t have much time to find a place, or don’t want to be responsible for the upkeep of your home, renting is the better bet for you. Otherwise, buying a home is probably the better option— as long as you can truly afford to buy.

Can You Afford to Buy?

Over the long term, buying a home is usually more cost-effective than renting one. But in the short term, buying a home is always more expensive because there are a number of significant up-front costs:

• Down payment: A one-time cash payment that is typically 5–20% of the purchase price of the home. Buyers who pay less than 20% must usually pay additional private mortgage insurance (PMI).
• Closing costs: The various fees that lenders charge for processing your loan. These charges are usually 1–5% of the overall purchase price.
• Property taxes: State and/or local taxes levied on your home. Property taxes vary widely by jurisdiction, but expect to pay at least 1% of the purchase price of your home per year.
• Insurance: The cost of homeowner’s insurance and title insurance. Homeowner’s insurance covers your new house and its contents. Title insurance covers you if the sale of the home was somehow fraudulent. Insurance costs vary substantially depending on the value of your home and its contents.
• Repairs: Costs for any necessary or desired repairs, which vary widely depending on the condition of the home. If you’re interested in a property that needs substantial repairs, make sure to budget for the work.
• Moving costs: The more stuff you have and the farther you have to move, the more it will cost. Interstate moves typically cost $3,000 and up.

In addition to the savings needed to cover the up-front costs of buying a home, you also need a steady income to cover ongoing expenses, such as repairs and upkeep.

If you don’t have that savings and guaranteed income stream, it’s probably better to keep renting and build up some funds by cutting costs and saving money each month. Eventually you’ll be in the position to buy a home with confidence.