Data suggest that the average person spends 29 percent of their income on rent. For many, it is the most significant monthly expense, outstripping taxes, utility bills, entertainment, food, and vehicle costs.
For this reason, the question of when to stop renting and buy a home is essential. People want to know which is optimal for their long term wealth, and which will provide them with the highest quality of life in the future.
Calculating When to Stop Renting and Buy a Home
Knowing when to stop renting and buy a home is a complicated financial calculation. While some individuals might choose to buy a property for non-financial reasons (such as lifestyle), for others the decision is purely economic.
Economic theory suggests that the cost of renting a home and the cost of buying a home should equalize. Both renters and buyers want the best home for as little money as possible. If the price of renting accommodation goes up, people will switch to buying homes, bidding up real estate prices until the monthly mortgage cost is about the same as renting.
The real world, however, is typically more complicated than merely switching from renting to homeownership, and then switching back to renting as the economic environment changes. Because the expenses and logistics of selling a home on short notice present more difficulties than purchasing a home when a rental agreement expires.
When You Want to Build Wealth
Building wealth takes discipline and long term commitment. It requires people to make regular monthly contributions to invest in assets like stocks, shares, bonds, commodities, and real estate.
Homeowners are building wealth by building equity in a home as they pay their mortgage and their home appreciates, while also providing themselves with a place to live. Renters, on the other hand, are not building wealth by making rent payments.
When You Are Tired of Rent Rising
Rental prices for a one-bedroom apartment rose 4.2 percent on average in 2018. Wages only increased by two-thirds of that amount. The real cost of renting, therefore, went up.
Homeowners with a fixed mortgage did not see their monthly payment increased unless it was affected by other factors.
Renters, therefore, who want a more stable monthly payment for housing, while also building wealth through homeownership, may find the instability of rental prices a good reason to buy a home.
When Your Credit Score Improves
Homebuyers can get a lower interest rate with a higher credit score. So, as their credit score goes up, buying a home becomes less expensive.
When renting a home, however, the rental price does not change based on your credit score, and you pay the same whether your score is high or low. As a renter’s credit score goes up, therefore, the scales are tipped in favor of buying a home rather than continuing to rent.
When You Have a Low Debt-to-Income (DTI) Ratio
A great deal of the preparation to buy a home is preparing to qualify for a mortgage, which requires a proven track record of successfully managing debt. That’s why a borrower’s debt-to-income ratio is so important.
43 percent is generally the highest DTI ratio a borrower can have to qualify for a mortgage, though some lenders will go higher. Lenders, however, prefer a DTI ratio lower than 36 percent, with no more than 28 percent of that debt going towards servicing a mortgage or rent payment.
Renters, therefore, with a low debt-to-income ratio may want to take the opportunity to buy a home.
When You Have Money for the Down Payment and Closing Costs
Most home loans require borrowers to make a down payment, and there are also closing costs associated with the purchase of a home.
While there are some very good zero down payment home loans, such as for veterans, many homebuyers pay a down payment of anywhere from 1-20 percent of the cost of the home. Fannie Mae and Freddie Mac, for example, offer low down payment mortgages for 3-3.5 percent.
Closing costs are also paid at the time a home is purchased. Some of the more common closing costs include the lender fee, appraisal, credit report, flood certificate, title insurance, and more.
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When You Can Afford the Costs of Owning a Home
Maintaining a home can be expensive at times. The homeowner covers the costs of repairs and maintenance, such as mowing and landscaping the yard, repairing the roof, etc.
The cost of maintaining a home varies based on location and the amount of work the owners personally do on the home. Estimates vary from $1,200 to 1-3 percent of the total value of their property for repairs and maintenance each year.
When You Want To Stop Moving And Settle Down
When you own a home and want to relocate, you have the expense of selling your home. Plus, all of this can require a great deal of time and occasionally some headaches.
So, people who know they will move in a year or so, often rent to avoid the expense and hassles of selling a home and buying another one somewhere else.
One of the advantages of renting is that it is easier and less costly to relocate. So, many people decide to buy a home when they don’t expect to move for several years and want to settle down in one location.
When You’re Going Through a Major Life Change
For many people, buying a home coincides with a major life change, such as getting married or having a baby.
People who are recently married are top buyers of new homes. Many married couples have two incomes, making saving for the down payment and closing costs and paying the mortgage easier. Furthermore, homeownership often coincides with building a family, settling down, and creating an environment to raise the next generation.
Marimark Realty
Marimark Realty, home to the top New Tampa Real Estate Agents, focuses on providing a personalized experience for buyers and sellers of real estate. As a full-service real estate agency, we help clients with luxury homes, homes for first-time homebuyers, commercial property, and investment property.
To begin the journey of purchasing or selling your home, or purchasing commercial or investment properties, contact us at your earliest convenience.