When it comes to housing, what are some of the pros and cons of renting and buying? My wife and I have been married about four years. The subject of buying our own home has come up recently, but I'm not sure we're prepared for that kind of financial commitment.
Since World War II, the conventional wisdom has been that owning a home is always superior to renting, which is often equated with "throwing money down the drain." But conventional wisdom can and should change with the times. Under current economic conditions, renting can actually provide more flexibility than buying. Sometimes it even makes more financial sense.
That's not to mention that there's a serious flaw in the argument that a home is a "good investment." An investment is something you make for one of two purposes: either you expect it to generate income, or you hope that it will appreciate in value so that you'll be able to sell it for a profit. Generally speaking, people don't buy homes for either of these reasons — they buy them because they want to live in them.
A portion of mortgage payments go toward building equity.
Flexibility in moving later - no waiting for a house to sell.
Owner keeps any price appreciation.
Low amount of initial savings needed to move in.
Owner can make home improvements and keep the benefits.
Rent payments may be lower than mortgage payments with interest, taxes, and home insurance.
Our advice to young couples and others who are new to the housing market is this: resist the urge to jump immediately into a house before having an emergency fund and a significant down payment. A good goal is to pay at least 20 percent of the purchase price as a down payment. This probably means that you should save a little longer to buy that first house than you expected — or than is even typical.
If you're renting, rent should not exceed 25 percent of your gross pay. However, this rule of thumb is not as important as a mortgage payment guideline because rent is usually short term — if you've overcommitted to a rent payment, you can usually change your circumstances fairly quickly. By way of comparison, you are usually better off to buy a house only if you expect to live in it for at least two years — and the longer you stay, the more cost-effective your investment will be.
When deciding whether to buy or rent, you should also take into account the nature of your occupation, the location, and your needs and goals. If your vocation requires you to move every two to five years, renting would probably be just as wise as purchasing. If, on the other hand, your family wants to establish roots in a neighborhood and minister to others through your home, owning a house may be more appropriate than renting.
In sum, you need to evaluate the purchase of a house with a long-range perspective and also in the light of your vocation and lifestyle desires. Owning a home may be an important part of the "American Dream," but use wisdom in deciding whether it's best for you.
Should You Buy or Rent?: Ron Blue examines common mistakes that are made when buying a home and offers advice on how to avoid them.