It can feel as if paying rent every month is akin to throwing money away. You don’t grow equity in a home, nor do you have a place to call your own or customize as you see fit (farmhouse kitchen sink, anyone?).
Perhaps you’re wondering if the time is right to buy a home or at least start saving for one. Maybe you’ve caught DIY fever and have ideas about what your dream home would look like and have been watching videos of how to redo a backsplash and plant some annuals. Or maybe you are planning on enlarging your family and think it’s time to become a homeowner, since a yard and playroom sure would be nice.
But there are other considerations, especially financial ones, to contemplate as well. The housing market has been hot, and pulling together a down payment plus affording a home loan may stretch your budget. Maybe renting is your best bet after all.
“Am I financially ready to buy?” is certainly one question you will likely want to answer. But it’s not the only issue. Here, learn the four signs that you may be ready to join the ranks of first-time homebuyers.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Renting a Home vs. Owning a Home: Pros and Cons
One important way to know if you are ready to be a first-time homebuyer is to consider the pros and cons of owning vs. renting.
First, take a closer look at the benefits of owning:
• You know what your housing payments will be in terms of your mortgage amount, especially if you opt for a fixed-rate mortgage.
• Month by month, you will build equity in your home.
• As your equity grows, you may be able to borrow against it for other financial goals.
• Owning a home can be a step toward building your net worth.
• You may qualify for tax deductions.
• On-time payments can help build your credit history.
• You can customize your home to reflect your particular needs and tastes.
Now, here are the cons of owning a home:
• You often need to come up with a down payment, which can be hard to save for. There are also closing costs to be paid.
• You need to qualify for a mortgage.
• You also need to budget for property taxes and related expenses such as insurance.
• It will be your responsibility to pay for home repairs and upgrades, which may make having a healthy emergency fund more important. If, say, the furnace conks out, there’s no landlord to call for help.
• Your mortgage, as well as taxes and other expenses, could add up to more than rent.
• You are making a long-term commitment to owning a home. While, of course, you can always sell a property, it’s in your best interest to stay put and recoup closing costs and other expenses vs. picking up and moving frequently.
Next, think over the pros of renting:
• It could be cheaper than owning. Your rent could be less than the mortgage, and you won’t have property taxes to pay.
• Repairs and maintenance will likely be your landlord’s responsibility.
• You’ll have the flexibility to move more easily when you want to.
• You don’t need to come up with a down payment or qualify for a mortgage loan.
Last of all, take a look at the cons of renting:
• You won’t be building equity in a property as you make your monthly rental payment.
• Your net worth will not grow with rising property values.
• You won’t have the security of ownership and its costs. Your landlord could raise your rent or decide not to rent the property any longer.
• Your payments typically don’t build your credit history.
• While you can likely decorate as you please, you won’t be able to upgrade or renovate as you might with a home you own. For instance, even if your landlord did allow you to get a new smart fridge, you probably couldn’t take it with you when you move.
💡 Quick Tip: Buying a home shouldn’t be aggravating. Online mortgage loan forms can make applying quick and simple.
Renting a Home vs. Owning a Home Differences
Deciding whether to buy or rent is a major decision that can involve your financial and personal needs and aspirations. Here are some specifics:
• Renting a home offers you more flexibility in terms of when and where you move; you will likely feel less anchored in a property.
• Renting may well be less expensive: You don’t need to come up with a down payment, and rent may cost less than a mortgage or a mortgage plus property taxes.
• However, when you have a mortgage, you are likely building equity and wealth, which you may choose to borrow against in the future (say, with a cash-out refinance). You may not have that feeling of “throwing money away” every month on rent.
• When you buy a home, you are on the hook for that monthly payment, but, if you have a fixed-rate loan, it is more predictable than rent which may fluctuate with the housing market.
• As a homeowner, you would be liable to pay taxes and insurance, as well as bankroll any renovations and upgrades to your home.
• When you own your own place, you can personalize it to suit you, whether that means putting in a spa bathroom, knocking down walls, or building a patio.
Buying a Home vs. Renting an Apartment
When it comes to deciding whether to buy a property or rent a home (say, an apartment), there is no right or wrong answer.
• Renting is often more affordable, allowing you to save money and perhaps meet other money goals like paying down debt.
• Renting is more flexible in most cases. If you rent an apartment, you are able to move at the end of your lease (or possibly before) without a lot of hassle.
• When you rent an apartment, your landlord is probably covering property taxes and will be responsible for repairs, such as HVAC upgrades or a clogged sink.
That said, when you buy a home, you may find the following:
• A bigger financial commitment may be required (down payment, closing costs, property taxes, home maintenance), but you are building equity and possibly growing your wealth.
• You can make your place yours and renovate it to suit your taste.
• Buying a home vs. renting an apartment can give you a sense of security: You won’t have a landlord who can raise your rent by a major amount, and you can put down roots in a community.
4 Signs You May Be Ready to Buy
If you think owning a home vs. renting is right for you, here are four signals that you may be ready to move ahead.
1. Your Budget Is Big Enough to Cover the Expenses
Home ownership isn’t all gain, no pain. Expenses may include:
• Down payment and closing costs
• Mortgage payments, including property taxes, homeowners insurance, and, if applicable, private mortgage insurance
• Repair and maintenance costs, including HOA dues, if applicable.
How can you budget for these upfront and ongoing expenses? One way is to take a look at the average amount each of these costs in the housing market where you plan to buy a home to get a sense of how home-related expenses may affect your finances in the larger picture.
Doing some number crunching with a home affordability calculator may be enlightening.
You may get excited about buying a fixer-upper when watching home improvement shows. A common mortgage for such homes is an FHA 203(k), backed by the federal government, which includes money for the purchase price and some repairs and renovations.
Buyers will need to get bids for all the repairs they hope to fund with the loan. For less extensive repairs/improvements, there’s a Limited 203(k).
If the desired renovation is on the smaller side and you acquire a traditional mortgage, cash or a personal loan are options.
You can get an idea of how much your chosen home repair or improvement costs will be with this home improvement cost calculator.
💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.
2. You Plan on Staying Put for a While
Buying a home signals more of a commitment to location than renting. If you’re likely to relocate in the coming couple of years, renting may be the right move.
Here’s why: If you buy a home and sell it soon after, there’s a chance you’ll barely break even. That’s because real-estate commissions and other factors will come into play. And the financial and emotional stress of selling again soon after buying can be significant. On the other hand, if you can see yourself staying put in your new home for a while, it might be a sign to start shopping.
3. You Have Good Credit
Your good or better credit profile may have been advantageous when applying for a place to rent.
The credit you’ve spent years building will likely pay off in a bigger way once you make the move to own, with improved lending terms such as a lower mortgage rate offered.
What credit score is needed to buy a house? The average American’s credit score remains in the range considered “good.” But applicants with “fair” and even “poor” credit scores can and do secure mortgages.
Here’s how credit scores are usually classified:
• Excellent: 800–850
• Very good: 740–799
• Good: 670–739
• Fair: 580–669
• Poor: 300–579
If you’ve spent years building your credit and your number reflects that, then you might be financially ready to buy a home.
Credit score requirements for loan program eligibility and pricing can vary from lender to lender, so you may want to shop around.
4. Rents in Your Area Are High
In many markets, the rising price of rent could make buying more enticing than ever. It may be a smarter move to invest your money toward homeownership vs rent.
Two big factors to consider are:
• How long you plan to stay in your home
• The price-to-rent ratio, which compares the median home price and median annual rent in a given area.
Several websites (such as Zillow, Trulia, and Realtor.com) have tools that allow you to assess the dollars and cents of renting vs. buying. Estimating your break-even point of renting vs. owning a home could be another useful way to answer the question of whether it’s a good time to buy a home.
It’s best to take the calculations with a grain of salt, though. These are general estimates, and no one can predict the future of housing prices, rents, and taxes.
The Takeaway
When considering whether to buy vs. rent, there’s not one right decision. It’s a matter of which scenario suits your life and your financial situation at a given time.
Signs that you may be ready to buy a home can include having an adequate budget for the costs involved and a good credit profile, a desire to put down roots, and an understanding of the price-to-rent ratio in your target area.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
What are the advantages of owning vs. renting a home?
There are several pros to owning vs. renting a home. You can build equity in your home and potentially grow your net worth. What’s more, you can personalize your home however you like. You’ll also have stability in terms of both knowing your housing costs every month (versus a surprise rent hike) and putting down roots in a community.
What are 3 disadvantages to owning a home?
There are several cons to owning vs. renting a home. You may face higher costs (down payment, closing costs, mortgage, plus property taxes). In addition, you will be responsible for home maintenance, which can be pricey and require your time and energy. You’ll likely have less flexibility in terms of moving, too.
What is the main reason to avoid renting to own?
Renting to own can be problematic if you change your mind. You can wind up losing your down payment and other charges.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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