You’ll often hear it stated that paying rent is throwing money down the drain. As a motivation to buy a home, however, that might not be the best idea. A rule of thumb is that if you can purchase a home for fifteen times what you currently pay annually in rent, buying makes sense. In real numbers, if your rent is $1,500 a month, your annual rent is $18,000. Fifteen times that amount is $270,000. That means if you can buy a comparable home for around $270,000, it makes sense to buy rather than to rent because you’ll break even in 15 years and will accrue equity beyond that.
But even if housing prices fit that scenario, what is your personal criteria?
Is renting throwing money away?
That depends. There are multiple rent vs. buy calculators online that allow you to plug in the variables that apply to your situation. The adage that it’s always better to buy may not fit into your lifestyle, career goals or plans. Don’t buy just because someone tells you that you’re tossing away your life savings. After all, if you have enough for a down payment, you can invest it in something more liquid than property.
But, buying is a fantastic idea if you love the community, see yourself living there for at least five years, and want to own your home.
There are some guidelines, however, to help you determine if you are ready. These require that you keep financial considerations separate.
- Do you still have student loans? If so, determine the impact that more debt places not just on your pocketbook, but on your psyche. If having education debt stresses you out, adding more debt to that is not a solution. Instead, before you buy a home, work with a student debt counselor to see if you can make some headway on your loans.
- Do you have an emergency fund? For some people, if they get a flat tire or the fuel pump goes out in the car, the burden of taking care of that emergency can throw all caution to the wind. Having an emergency fund of a minimum of $1000 for short-term emergencies (car repair, flight to a family funeral, etc.) and three to six months for long-term emergencies (extended illness, job loss) protects you from disasters lurking around every corner.
- Can you set aside money for home maintenance? If you replace your rent one-to-one with a mortgage (even including taxes, PMI, and homeowner’s insurance), you still need funds for regular home maintenance. Generally, you’ll want to set aside about one percent of the cost of the house minimum for annual maintenance. If you buy your home for $300,000, you’ll need to set aside an extra $250 a month (3% or $750 a month is better) to cover repairs, maintenance, and upkeep of your home.
The other questions you want to answer are: How secure is your job? Could you be moving within five years? Do you qualify for a good interest rate? Buying just to escape renting is never a promising idea. But if the answer to these questions leads you to believe homeownership is right for you, in the right location, and it’s the right time, find the right real estate professional to help you get there.