Rent or Buy? Tips for Making the Right Choice

“Do your planning and prepare your fields before building your house.” (Proverbs 24:27)

Buying (or building) a house can be a deeply emotional decision. It’s the place where you may raise your family, and make friendships in the neighborhood, and of course, it will become much more than a house; it will become your home.

It’s also very likely to be your single biggest financial decision, so you should weigh it carefully, making sure you’ve done your planning and are prepared. A good starting point it to determine if it truly makes sense to buy, or would it be better to rent? Here are some key questions to consider.

How is your credit score?

One very important factor that mortgage lenders will consider in deciding whether to grant you a loan and if so, at what interest rate, is the strength of your credit score.

Your credit score tells prospective lenders how responsibly you manage credit and debt. Of the five factors that impact your score, consistency in paying your bills on time is the most important one.

Credit scores range from 300 to 850—the higher the better. If you’re talking with a mortgage lender, they should be able to pull your score for you. You may be able to get a mortgage with a score as low as the low 600s. However, you’ll get the best interest rate if your score is 760 or higher.

If your score is on the low side, check your credit reports from each of the three credit bureaus (www.annualcreditreport.com) and see if you spot any errors. If so, there is information in each report about how to request a correction. If not, you may want to wait a while before applying for a mortgage, taking some time to improve your score.

How much of a down payment can you afford? If you make a down payment totaling less than 20% of the purchase price, you’ll probably have to pay for private mortgage insurance (PMI). This can cost from 0.5% to 1.5% of the borrowed amount and this, too, is impacted by your credit score. If you’re thinking of putting less than 20% down, be sure to factor in this cost as you weigh the affordability of buying a home.

Will you have any savings left?

If coming up with a down payment will completely drain your emergency fund, it may be best to rent until you have enough saved to cover the down payment and still have money in reserve. There’s a lot that can go wrong with a home, a lot of very expensive things.

Can you afford the monthly payments? One key difference between renting and owning is that homeowners are responsible for property taxes. To gauge the affordability of buying, draft two budgets—one for renting and one for owning.

Keep in mind that property taxes are a deductible expense, as is the interest you pay on your home loan. If your deductions exceed the standard deduction, the added property tax expense may be partially offset by lower income taxes. Fill out a 1040 and Schedule A to see how buying a home may impact your income taxes, or ask an accountant for help with this.

You’ll also have more expenses for maintenance and repairs, and probably some start-up expenses for furniture or lawn-care items.

To allow for the costs of home ownership while also being able to live generously and save and invest adequately, a good guideline is to devote no more than 25% of monthly gross income to the combination of your mortgage, property taxes, and homeowner’s insurance (as well as PMI if you put less than 20% down).

How long do you plan to stay in the area?

There are quite a few “closing costs” associated with buying a home. Whether you choose to roll some of those costs into your mortgage or pay them separately, a good rule of thumb is that you should anticipate staying in your home for at least five years in order to recoup those closing costs. If there’s a decent possibility that you may move within the next five years, renting may be your better option.

Making the right decision about whether to buy a home is critically important. You may not be farming the land around the home you’re thinking about buying, as described in the opening verse of Scripture. Still, there are other ways you can prepare, such as considering the factors mentioned above.

If you feel purchasing a home is right for you, click here to view mortgage loans offered by CCCU!