Since I was little girl, I’ve wanted my very own small-ish craftsman style house with a white picket fence and a luscious green lawn. Heck, I even started a blog which focuses on my quest for home ownership. But the more research I do, the more this question pops up: Should I buy a house?
The media makes a strong case for home ownership. The government promotes home ownership in the way of tax breaks. Most personal finance bloggers also lean toward ownership of property as being more financially savvy than the endless renter who squanders their money away each month. I’ve written a few posts comparing and contrasting renting versus buying with the hope of resolving this burning question that I just can’t seem to answer definitively.
So, should I buy a house? The answer just isn’t very cut and dry so I’m again comparing and contrasting the benefits of each:
Yes, yes, I should buy a house if…
- I plan on living in the area for 6 or more years. Most home owners will agree that it doesn’t make much sense (at least not anymore) to flip houses short of 5 or 6 years. Since most people need a mortgage in order to buy a house, those first few years of payments are only applied to interest (even on a 15-year loan).
- I’m paying cash. Not many people can say they paid for their home in cash. However, it makes sense to buy a home if you have the full amount rather than continue renting (unless your rent is so low that investing the lump sum is more profitable).
- I’ve saved up at least a 20% down payment. A large down payment means a smaller mortgage and a better APR.
- The rent vs. buy calculators show it’s a better investment than renting. I love using finance calculators to compare the home prices in my area to my current monthly rent. They often predict when and if it is a better financial move to rent or buy. Currently in my neighborhood, it is better for me to rent for 30 years than to buy a home. However, if I moved a few miles south or east, it would be a better idea to buy (but I wouldn’t want to!)
No, no, I should not buy a house if…
- I’m planning on leaving the area within a few years. Trying to resell a property only a couple of years after purchasing it will not be very profitable. And, if the housing market stays flat, it may be too difficult to sell it.
- I’ve not saved any money towards a down payment. Since the housing boom and bust, most banks want to see some kind of a down payment, preferably 20%.
- The houses are 8 to 9 times my income level. In my current neighborhood where I’m renting, homes are selling for an average of $600,000. No, I’m not making this up nor did I accidentally add one too many zeros.
- The rent vs. buy calculators show that it isn’t very profitable based on the prices of homes compared to my monthly rent. According to Michael Bluejay (he’s an incredibly smart guy) you can multiply your monthly rent by 240 for a ballpark of when it just isn’t affordable to purchase a home. So if you pay $1,000 a month for rent and homes in your area are going for around $180,000, you should buy! However, if homes in your neighborhood sell for $600,000 and your rent is $2,195, you should continue to rent! The catch here is that I’d have to invest the difference to make this a more profitable choice.
Obviously the answer for me is no, I should not buy a house. However, under different circumstances, such as I move to a more reasonably priced area and decide to stay there for a while, then buying may be a better option.
If you compare rental prices and home prices in your area, which makes more sense using the 240 calculation?