Many people believe buying a home is a good investment and that it is always a better financial decision than renting. That might not be true in all cases. There are times when renting can be smarter than buying.
The main argument for buying a home is that it is an investment. However, the Washington Post found home prices have grown at a compound annual rate of 0.3% over the last century while the S&P 500 has an annual return of 6.5% during that same period. Thus, while a home may protect you from inflation, it may not be as good of an investment as a well-balanced stock and bond portfolio. If making an investment is your only reason for purchasing a home, it may not be a good one.
There are many calculators online that tell you whether you should rent or buy a home, but they fail to consider opportunity costs. If rent is cheaper than your mortgage would be, you are missing out on the “opportunity” to invest that money into a more lucrative option. The New York Times has a calculator that considers rent costs, down payments and interest rates and your city to determine whether purchasing a home is a good idea.
Aside from the long-term investment considerations, you will also want to ask yourself if you want to live in the same place for at least three to five years. Buying and selling a house after just a few years can be an expensive mistake. First of all, interest is front-loaded on loans, so you will mostly be paying interest in the first few years. This means when you do sell your house after just a few years, it may be hard to make much profit (if any). Additionally, housing markets can fluctuate, and you cannot count on your home’s value staying the same or increasing in a short period of time, which means you could lose money if you sell after just a few years.
It is important not to overlook the fact that owning a home could give you an emotional boost. While it may not be a lucrative investment, you will eventually pay off your house and own something. This cannot be said of renting, where you will make monthly payments but never have an asset.
If you do decide to buy a home, you will want to make sure you purchase one you can afford. While you may be pre-approved for a large sum of money, it is important to buy a house you can actually afford. There are a number of mortgage calculators, including one offered by LendingTree, that can help you calculate how much you can afford to spend, but you will also want to consider your current debt and your other priorities, including kids and retirement. If you have a lot of high-interest debt, it may make more sense to pay this down before purchasing a home. As you consider a monthly mortgage payment, add in your other expenses and leave some cushion in your budget for savings and unexpected expenses.
Additionally, you may not want to purchase a home until you can put 20% down, as you will not have to pay Private Mortgage Insurance, your mortgage payments will be less and you will pay a lower interest rate. While the Federal Housing Administration and some banks will allow you to purchase a home with as little as 3.5% down, you will have increased costs, which means you will pay more for your home over time.
Additionally, if you are having a tough time saving money to purchase a home, you may also likely struggle to pay for any unforeseen expenses, such as repairs, yard upkeep, high utility bills and property taxes.