With home prices and rent prices at record highs, it might seem like you’re stuck between a rock and a hard place when trying to decide whether to rent or buy.
Here’s what you need to know to make the best financial decision:
When Should You Buy a Home?
Homeownership has long been considered the main aspect of the American Dream.
Here are some situations in which it’s probably better for you to take the plunge and buy a home rather than keep renting:
1. You Plan on Living There Long Term
If you plan on living in a neighborhood or a specific home for longer than five years, then it might be best for you to buy a home. Buying a home should be a long-term purchase since it will take several years for you to recoup closing costs and realtor fees.
Buying a home should also be a long-term purchase in the event that the housing market unexpectedly drops. That way, you have time and flexibility to wait it out to avoid selling at a loss.
2. You Have Money Saved Up
If you have saved an amount of money to ensure a sizable down payment, then you might be ready to buy a home. Even though you can purchase a house with as little as 3% down of the purchase price, a 20% down payment is always recommended to avoid paying private mortgage insurance or PMI.
However, with mortgage rates at record lows, it often makes sense for people to go ahead and buy with a lower down payment and pay the PMI as they are already saving money with their lower interest rate.
3. You Have a Good Credit Score
If you have a good credit score, then you might be ready for a home purchase. A good credit score plays a huge role in your ability to secure a monthly mortgage payment with a favorable interest rate since your credit score basically tells lenders how risky it would be to lend you money based on your credit card and financial activity.
A high credit score shows that you’d be a low-risk borrower and translates into lower interest rates. A low credit score shows that you’d be a high-risk borrower and translates into higher interest rates.
If your credit score isn’t where you want it to be, don’t panic. There are things you can do to boost your score and, in turn, your chances of securing a mortgage loan:
Pay off your debts: The most impactful thing you can do to improve your credit score is to pay off your debts. Just keep in mind that doing so might result in a temporary drop in your score, although it should increase in the long term.
Make your payments on time: Missing a payment can quickly tank your credit score, so it’s incredibly important to make all your debt payments on time, even if you can only pay the minimum balance.
You may want to consider scheduling payments in advance or using autopay to avoid forgetting to make a payment.
Avoid hard inquiries: You should also avoid any hard inquiries for other loans, as these tend to impact your credit score. Multiple hard inquiries in a short period of time also won’t look good to a mortgage lender.
Strategically open new accounts: At the same time, you may want to consider strategically opening new accounts as they can boost your credit limit and reduce your credit utilization ratio.
Opening a new account can also decrease the average age of your accounts, which also affects your credit score. Having a mix of credit is seen as a good thing. However, achieving this without negatively impacting your score can be a bit of a balancing act.
4. You Have a Stable Job
If you have a stable job, then you might be in a good position to buy a home. Understandably, lenders are very concerned about the stability of your employment as your job status likely indicates your ability to make your mortgage payments.
Generally speaking, mortgage lenders want to see at least two years of consistent employment history, although you don’t necessarily need to work for the same employer for two years. There are also exceptions for recent graduates who may not have two years of experience yet and for people changing companies, jobs, and industries.
When Should You Rent a Home?
While homeownership certainly has its benefits (like building equity), it’s definitely not for everyone. Here are some situations in which it’s likely better for you to keep renting rather than buying a home of your own:
1. You Plan on Moving in the Near Future
If you plan on moving in the near future, you may want to wait to buy a house and rent instead. One of the best things about renting is that you’re only locked into a lease for a year or so instead of being locked into a 30-year mortgage.
2. You Live in an Expensive Area
If you live in an expensive area where it would be nearly impossible for you to afford to buy a home, then you may be better off renting. And even if you could technically afford to buy a studio or one-bedroom condo in a big city like New York City, Los Angeles, or San Francisco, odds are that these units will come with extremely high HOA fees and dues. These can cost as much as your mortgage itself (not to mention property taxes).
To determine whether it’s better to rent or buy in pricy areas, there are cost calculators you can use to make an informed decision.
3. You Don’t Want to Deal With Maintenance
If you don’t want to deal with all the maintenance costs that come with owning a home, then you should probably stick with renting. Homeowners are advised to put aside money into an emergency fund every month to cover unexpected repairs. If something does happen, they not only need to pay for it, but they also need to find someone to do the work.
If you’re a tenant, on the other hand, your landlord finds people to make repairs and pays for them. So instead of doing a ton of work and spending a lot of money, all you have to do is send a simple text or email to let them know about the problem.
Additionally, the renter might not even be charged for utilities in their apartment or home. Their monthly rent may cover these expenses. On the flip side, renters might lose their security deposit, or if the home values in their area increase, they could see rental prices soar.
How To Make Buying a House More Affordable
Even if you think that you couldn’t possibly afford to buy a house in your current financial situation, there are things you can do to make buying a house more affordable.
1. Improve Your Credit Score
The first thing you can do to make buying a house more affordable is to improve your credit score. The mortgage rates you receive from lenders are largely based on your credit score. If you have a lower score, you’re going to receive a higher interest rate which is going to result in higher monthly payments.
Even seemingly small differences in interest rates can make a big difference in terms of affordability. For example, let’s say that you’re purchasing a $360,000 house in Florida and your credit score is above 740. Since you have a good credit score, your interest rate would be about 3.372%. Then, your monthly payment would be about $1,326.
However, if you have a credit score between 660 and 679, your interest rate would be about 4.219%, and your monthly payment would be about $1,470 — nearly $150 more than it would be with a better credit score.
2. Shop Around for Better Interest Rates
As you now know, just a few tenths of a percentage point can translate into a substantially higher mortgage payment. Many first-time homebuyers only get pre-approved by their bank and just assume that they’re getting a good deal.
Unfortunately, that’s likely not the case. So to make sure that you’re getting the best possible interest rate, try to get quotes from multiple different lenders.
3. Negotiate Your Closing Costs
Closing costs are often unexpected costs that can prevent home buyers from being able to finalize the purchase of their new home. Lenders charge closing costs to cover the cost of processing the loan.
These costs can range from anywhere between 2% and 5% of the loan amount. So if you’re getting a loan of $300,000, your closing costs would range from $6,000 to $15,000.
Clearly, this is a big range! So how can you make sure that your closing costs fall closer to 2%? For starters, you could choose your lender based on their closing costs. You could also try negotiating with them.
You might be able to eliminate some of the fees that are associated with your closing costs. Finally, you could even decide to wrap your closing costs into your loan amount so that you don’t have to pay them upfront.
4. Apply for Down Payment Assistance
One thing that many home buyers aren’t aware of is down payment assistance. Down payment assistance programs can help you cover the substantial upfront costs of buying a home.
These programs are offered in every state, although the details and qualifications vary. Most of these programs have purchasing limits and income limits, as they’re designed for low to average income borrowers.
So before you write off buying a house because you can’t afford to make the down payment, check to see what types of down payment assistance programs are offered in your state.
5. Buy a Fixer-Upper
Housing prices are on the rise and are pricing a lot of buyers out of the market. And while there’s a high demand for move-in-ready homes that drives up prices, there’s a lower demand for fixer-upper homes that often translates into more affordable prices.
So if you’re willing to get your hands dirty to purchase a home of your own, you may want to consider purchasing a fixer-upper and slowly making changes to it over time.
6. Avoid HOAs and CDDs
Homeownership often comes with tons of extra costs that put it out of reach for many people. However, you can avoid extra costs in the form of a Homeowner’s Association (HOA) and CDD fees by not purchasing in communities that charge these fees. Instead, look specifically for houses that aren’t in HOA and CDD communities.
Make Your Home Buying Dreams a Reality With Vaster
As you can see, homeownership may be more realistic than you thought. Home buying is easy with private lenders like Vaster, who offer more flexible qualification requirements and more efficient closing timelines.