Rent vs. Buy: Long-Term Financial Implications
Rent vs. Buy: Part 3 of 5
When deciding if buying a home is the right move for you, the first step is to figure out whether you can afford the mortgage rate and all of the other costs associated with homeownership.
While many people analyze that first big financial question, too many overlook the next important rung, which is to look down the road and evaluate the implications of homeownership on your future. You should consider what your life might look like two years, five years or 15 years into your mortgage.
As you perform a cost-benefit analysis of homeownership as it compares to renting, take some time to look at your money situation. The rent vs. buy decision will be easier once you’ve peeked into the future of your finances.
Start by looking at your savings. Financial experts recommend having three to six months worth of expenses set aside in a savings account. You can use this money if you unexpectedly lose your job or face a property crisis. Without the savings, being unemployed could mean giving up your standards of living immediately or forcing you to seek help.
If your down payment wipes out your savings, you will not have a cushion if an unexpected financial emergency arises. For this reason, you should not sacrifice your savings to purchase a home—you’re better off saving more money on top of your emergency fund.
Acknowledge Your Goals
Next, make a list of some of the medium- to long-term goals and responsibilities that require money. Will you have kids? Will you be supporting elderly parents at some point? Do you want to retire early or have dreams of extensive travel? All of these have financial implications. Remember that saving for your future is just as much a current expense as a mortgage payment, and your income has to support both.
If purchasing a home means you have to reallocate means from any of your goals, you may have to give that thing up down the road. Owning a pricey home on a modest budget may mean having fewer children or giving up traveling. Keep in mind that your budget has to balance one way or another.
Consider Mortgage Payments
Speaking of income, will your mortgage payment be so large that it takes two salaries to pay it? If so, consider the possibility that one of those salaries could go away or be reduced in the event of a job loss, change of job or even by choice. If your aforementioned savings is non-existent, you could find yourself in a position where you are unable to make the mortgage payments without the help of a rich relative.
Many financial experts suggest that your housing costs only consume about 30 percent of one person’s income. That way, if your spouse ever loses his or her job, you’ll still be able to afford your home. Figure out what your individual 30 percent is and whether a mortgage payment fits within that parameter.
Think About Return
It’s also critical to value the opportunity cost of the money that you would use to buy a home. Although home prices can appreciate, there is no guarantee, and if you put all your savings into a home that leaves you with nothing to invest elsewhere, you could jeopardize your long-term financial needs.
Length of Your Stay
Think about your time horizon for staying in the home. Will you be there long enough to recover your closing costs? Remember, the real estate market can be unpredictable, so if you need to sell your home quickly due to unforeseen events, you may be forced to sell your property during a market downturn. In this case, the question of buy or rent is a little easier—you don’t risk losing money if you have to leave after only a year or so.
Length of time you live somewhere also ties in with return on investment. However, as we said, the real estate market is hard to predict, so don’t use your house as your only investment.
Bringing it All Together
The points we mentioned are important on their own, but they are even more impactful when considered as a whole. Compare possible mortgage payments to rent costs and estimate how long you’ll stay.
Would you pay more with the mortgage or the rent for that amount of time? Do those payments allow you to save for your future and meet life goals? Have you considered costs associated with maintenance?
You can write a list of costs associated with renting and buying and compare them side to side. The rent vs. buy decision is complex, as is the American Dream. Really, you want your housing to be something you can afford and that complements your future goals.
In our next post in this series, we’ll explore lifestyle considerations in the rent vs. buy decision.
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