Renting vs. Buying

Feb 03, 2014 |Rachel Cruze
Renting vs. Buying

How to know when it makes more sense to rent and when you're ready to buy your first home

For most people, buying a home is the largest financial decision they will ever make.

Whether you pay with cash or take out a mortgage, you'll probably spend hundreds of thousands of dollars on your living situation over the course of your lifetime.

When it comes to buying a home, the key is knowing when it's actually the right time to buy one. Sometimes you'll be better off renting for a few years to prepare yourself for the financial reality of a mortgage.

With that in mind, let's take a look at when it might make more sense to rent.

  • When you're fresh out of college. It's simply not smart to buy a house when you're right out of school. You have too many unknowns to think about — like where you'll work, whether or not you're in a relationship, and if you even have enough money for a mortgage in the first place. You have so many transitions and changes right out of college that the last thing you need is to be tied down to a house.
  • When you're moving to a new city. I can't tell you how many times I've heard of people who move to a new city and buy a house right away, only to realize later that they would rather live in another part of town. By renting for a year after you move, you can learn about all the different areas of town and decide which one best fits your needs and budget.
  • When you're a newlywed. I always recommend waiting a minimum of one year after you're married to buy a house. Just like the other situations, newlyweds have a lot of transitions in their lives. Job and income situations change from year to year at that point in life, so locking into a mortgage probably isn't a smart idea.

Now, are there exceptions to these situations? Of course!

If you're an older newlywed who has owned a house for a while, then it makes perfect sense for your spouse to move in after you're married.

If you're already familiar with the town you are moving to, and if you've already saved up a down payment, then there's nothing wrong with buying a house after your move.

There are always exceptions. The key is to make smart long-term decisions with your hard-earned money.

Is Renting OK?

Don't buy into the perception that renting is somehow a bad idea. You're not wasting money you could use on a mortgage. Instead, you're showing patience, discipline and good stewardship of your income.

Remember, your goal is not just to buy a house — it's also to make a good investment. You should never buy a house simply because you can. You want to find the situation that works best for you.

If you jump into a mortgage before you're ready, you could make a major financial mistake that could set you back years.

What about the market? If it's a buyer's market, shouldn't you jump right in and buy a house? Only if you're financially prepared.

When Should I Buy?

To buy a house, you need to be out of debt and have a minimum of three months of expenses saved up in an emergency fund. You also need to have at least a 10-percent down payment ready, and you should seriously consider saving up 20 percent. Never let the market and economy dictate your home-buying decisions.

Also, don't just focus on the mortgage payment when you're considering buying. You'll also have homeowner's insurance, private mortgage insurance (PMI) if your down payment is less than 20 percent, and all the other expenses that go with a house. Don't forget about stuff like electricity, water, heating and air, keeping up the lawn, and so on.

There are plenty of real estate agents who can give you professional advice on which house and what area of town works best for your budget. But at the same time, don't just take their word for it. Do your own research as well.

It's easy to hop online these days and find information on any house you're interested in. Sure, it's the internet, so it's not gospel. But it should give you a good starting point in understanding what's out there and what to expect once you start riding around with an agent.

And, remember, your ultimate goal when it comes to your house should be to pay that thing off. If you want to dream big, imagine yourself putting down 100 percent cash for your house.

It's happened! I've read many stories about young people who saved and saved and saved and got on the 100-percent-down plan when they bought their house. Even if you take out a mortgage, your goal should be to pay off that loan as quickly as possible. Every dollar you pay to the bank is a dollar that you can't pay yourself.

Buying a house isn't cheap, and neither is maintaining one. That's why you truly need to be ready before taking that first big step.

Renting is a great way to make sure you know what you're getting into before you take the plunge. If you're feeling a little uneasy about buying a house, there's nothing wrong with renting for a while to work through all your questions.

Copyright 2014 Rachel Cruze. All rights reserved.

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