When renting makes more sense than buying a home

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When renting makes more sense than buying a home

Homeownership is a long-term financial goal for many Americans who want a place to call their own. But just because you dream of a owning a home doesn’t mean you should always be ready to buy. In reality, your circumstances may dictate renting (temporarily, at least) as the better option.

Here’s when renting your home makes more sense than buying.

The future is uncertain

Buying a home is only a good idea if you plan to stay put for a while. If you’re uncertain about your current job, your hometown or your relationship, it probably makes more sense to rent. If you buy a home and you end up having to move within a few years, home ownership may be more trouble than it’s worth and you won’t recoup your moving and closing costs.

“If you’re in a fluid situation where you may have to move around on short notice or may only be staying in a location for a particular period of time, we generally recommend renting as the best option,” said Glenn Moore, certified financial planner at Gibraltar Financial. “If unable to sell, the homeowner is forced with either making a mortgage payment for a home that they are no longer living in … or they may have to rent the property out.”

You can’t afford the monthly expenses

Sure, you can afford your rent payment, but that doesn’t mean you’re ready for a mortgage. Homeownership involves much more than paying down the principal on your loan. Before you start home hunting, make sure you can afford the full monthly costs.

“Many mortgage calculators only give you your predicted interest and principal payment which doesn’t include taxes, home insurance, private mortgage insurance or home repairs,” said Jen Smith, personal finance expert at The Penny Hoarder.

You can’t afford up-front costs

The greater the down payment you can produce, the less you’ll owe on your home. And if you can save at least 20% of the purchase price, you can avoid costly private mortgage insurance. But down payments are only part of the up-front expenses: There are also closing costs, which can be upwards of thousands of dollars for an average home.

Closing costs include mortgage application fees, attorney’s fees, inspection fees, title fees and more. They typically range between 2% and 5% of the home’s purchase price. And while you may be able to negotiate the seller into paying some of these fees, it’s difficult to do when you’re competing with other buyers in a seller’s market.

Your credit needs improvement

Just because you passed your landlord’s credit check doesn’t mean your credit score is in home-buying shape. You’ll want to have a solid credit score to improve your odds of landing a mortgage and paying lower interest rates. If your credit score is under 700, you may not even be able to qualify for a conventional loan (although you may qualify for a Federal Housing Administration loan).

If your credit score needs improvement, spend some time building it up before you start shopping for homes. The process may take a while, but you’ll be in better shape to buy when the time comes.

You don’t want to make repairs

Renting usually means the landlord will take care of emergency repairs and general maintenance. If you aren’t interested in do-it-yourself repairs or expensive contractors, you may not be ready for homeownership.

“A person might be able to make the payment but they must consider maintenance and repairs that will be required,” said Steve Johnson, president at Real People Realty. “You would want to have the ability to save a few hundred dollars per month to set in reserve for home repairs and emergencies.”

You don’t have an emergency fund

Before you buy a home, you should have a sizeable emergency fund for home repairs or crises, such as flooding or fires. It’s a good idea to have at least three to six months of expenses tucked away.

“It’s worth waiting until you have an emergency fund so you can afford all the expenses that come with owning a home. Also, the bank checks to see how much you have in savings before it approves your mortgage so savings will work in your favor even if you don’t use it,” said Smith.

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