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Should You Continue to Rent or Buy a Home? 5 Things to Consider

March 08, 2017 · 6 minute read

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Should You Continue to Rent or Buy a Home? 5 Things to Consider

When the rent check is due, does it feel like pouring money down the drain? Are you spending your free time swiping through real estate listings? Do you dream of spending Saturday mornings at the Home Depot?

If you answered yes to any of the above it might be time to stop renting and consider buying a home. However, buying a home isn’t as simple as finding a place to rent—it’s a huge investment.

But, that doesn’t mean it’s a purely financial decision. You may be seeking more space for your growing family, or craving the community aspect of living in a suburb. Or maybe you’re just feeling ready to achieve that major milestone of being a homeowner.

That said, it is recommended to start with an objective framework that will help you answer the question, “Am I financially ready to buy?” before factoring in the emotional reasons. Because your heart might say “I’m ready for my own backyard,” but your wallet might tell you, “We can’t afford it.” You may want to think past the dreamy aspects of owning, and take a look at the financial commitments involved with purchasing a home.

So, are you financially prepared to buy a home? Here are five common signs the answer may be yes:

1. Your budget is big enough to cover the expenses

These expenses may include, but aren’t limited to:

•   down payment, closing costs
•   mortgage payments, including property taxes, homeowners insurance, PMI
•   maintenance fees, including HOA dues if applicable, deferred maintenance

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 area where you plan to buy a home to get a sense of how home-related expenses may impact your finances in the larger picture. To get a better understanding of how much house you can afford check out our home affordability calculator. Don’t forget to factor in any estimated cost of repairs, as well as an emergency fund.

Other costs to keep in mind might include renovation expenses. These repair or renovation expenses may be based on the condition of your home and/or the upgrades you are wanting.

You may get excited about a fixer upper when watching home improvement shows, but certain repairs can get pricey or if they involve health and safety issues, may even render the potential purchase ineligible for financing. You can get an idea of how much your chosen home repair or improvement costs will be with SoFi’s Home Improvement Cost Calculator.

2. You plan on staying put for a while, possibly giving your home a chance to appreciate its value

Buying a home signals more of a commitment to location than renting. Sell a place and move out too soon? Depending upon market conditions in the area, there’s a chance you’ll barely break even due to additional real estate agent commissions and other factors that can come into play. If you can see yourself staying put in your new home for a while, then it might be a sign to start shopping.

One idea is to utilize this Zillow tool to view home value appreciation percentages in the area you are interested in. Keep in mind that past market appreciation does not guarantee continued price gains.

Some recommend checking for any future changes in the area such as corporate layoffs or zoning updates, etc. that may have an effect on future property values. Ask your real estate agent about the stability of prices in your chosen area.

Of course, money and home value appreciation aren’t the only reasons you might consider staying put. It is recommended that you take your career trajectory and family planning into account when thinking about tying a chunk of change into a home. You’ll likely want to determine that there isn’t a chance you’ll have to move any time soon. The financial and emotional stress of selling a home soon after buying it likely isn’t worth it.

If you think you won’t be in the same place for awhile, you may want to think twice about buying a home or explore how your finances would be impacted if you had to move in the future and/or convert the property into a rental.

Searching for other ways to possibly increase the home’s value? Check out this Home Project Value Estimator to find out the possible rate return on your next project.

3. You itemize your tax deductions and are likely to benefit from writing off mortgage interest

Tax season isn’t always a drag for homeowners. In owning a home, your personal finances might benefit from writing off mortgage interest. This is an upside that can only exist once you take on a mortgage loan. Though there will be other tax-related implications when it comes to owning, ones like these have a positive impact on your finances.

It is recommended to check with your tax professional before buying a home simply for the tax deductions. Prior to the passage of the Tax Cuts and Jobs Act in December 2017, 54% of homeowners who paid interest on their mortgage saw a benefit . Since 2017, it’s estimated that up to 90% of homeowners paying interest in their mortgage don’t appear to be benefiting from a mortgage interest tax deduction.

In order to qualify for the deduction, taxes need to be itemized. For some individuals, this could mean that claiming the deduction isn’t worth itemization. Everyone’s situation is different so you’ll have to determine whether or not this deduction applies to your financial situation. Consider consulting a tax professional who may be able to provide some clarification or advice.

4. You have good credit, which may help you qualify for better loan terms

Your awesome credit profile may have some advantage to you while 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—and improved lending terms such as a lower mortgage rate offering could be where you’ll reap the rewards.

What’s the magic number? That would likely depend upon the lender and loan program you choose, using Experian’s model , here’s a quick primer on what your credit score could mean for your mortgage:

•   800+ is considered an exceptional score.
•   740-799 are considered very good scores.
•   670-739 are generally viewed as good scores.
•   580-669 is considered fair
•   300-579 is considered poor by some standards.

Generally, the better your credit score, the more options you have when applying for a mortgage. 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 shop around.

5. Rents in your area are high relative to home prices

On average, rents rose by 3.7% in the past year. . In many markets, the rising price of rent could make buying more enticing than ever depending upon the market conditions of the area you are interested in. This may be reflected in a good number of major metropolitan areas in the states, and means, over time, it may be a smarter move to invest your money toward home ownership vs rent.

From this list, two highlighted factors are:

•   How long you plan to stay in your home
•   The ratio of home prices to rents

Trulia’s rent vs. buy calculator is another tool available that may help you estimate the breakeven point where it might make sense to invest in a home.

Rent vs. Buy calculators, can provide helpful insight that could help potential home buyers compare the costs of renting vs buying a home.

The tool allows potential home buyers to enter information like the estimated rent, home price, desired down payment, and more to calculate when buying might be more affordable than renting. Estimating your break even time frame could be a useful data point when answering the question of whether it’s a good time to buy a home.

While these calculators can provide helpful estimates, it’s important to take these calculations with a grain of salt. The calculator allows you to make adjustments specific to your situation, and generally, the more specific information you’re able to provide, the better estimate you can expect. It’s worth noting that these are general estimates and no one can predict the future of housing prices, rents, and taxes.

And now, if the financials make sense for you, you may want to consider the emotional perspective. For example, do you crave the autonomy of owning your own place? Are you dying to have control over paint colors and tile choices? And are you willing to live without your landlord (and his midnight visits to fix your broken heater)?

For example, let’s say you’re a San Francisco renter paying $4,500/month on a 2-bedroom apartment, and you’re considering upgrading to a $1,000,000 3-bedroom home in Oakland and staying for at least seven years.

At a 25% income tax rate, 3.7% mortgage rate and 3.3% annual capital appreciation rate, the calculator estimates that buying would be 37% cheaper than renting. But, if you’re staying for only two years, renting would still be 30% cheaper than buying. (This is why, if you’re in the market to buy a home, it’s important to know if you plan to stay put.)

Of course, it’s important to take these calculations with a grain of salt. Make sure to adjust the calculator settings to fit your situation, and remember that no one can predict the future of housing prices, rents, and taxes. But estimating your breakeven time frame can be a useful data point when answering the question of whether you can afford to buy a home.

Ready to take the next step?

If you’re ready to take the next step in the homebuying process, consider taking a look at SoFi’s mortgage options. With SoFi, eligible borrowers have loan options with as little as 10% down. Pre-qualification can be done online in as little as two minutes. SoFi also offers competitive rates and mortgage loan officers are available to guide you through the entire loan process.

Find out more about the options available with a SoFi mortgage loan.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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