Like getting a job, buying a car, getting married, or having a child, home ownership is viewed as one of the markers of becoming a “real” adult. Despite hitting those milestones at a later age than their Baby Boomer parents, and dealing with the blow of a tough economy right as they entered the job market, the majority of Millennials still believe in home ownership — even though it’s not the best option for everyone.
When deciding whether to rent or buy, it’s important to think critically about which option best matches your goals, values, and financial situation.
The Eternal Debate: Rent or Buy?
The decision to buy a home comes with a lot of pressure and expectations. You might be feeling the pressure from your parents, who probably owned a (much cheaper) home when they were your age. You might be jealous of friends who have reached more of those life milestones than you have. And the most pressure might just be coming from yourself — a desire to be more adult than you feel you are, or a desire to provide yourself and your family with a “proper” home. I succumbed to that pressure myself when I bought a home at 21. Looking back, I can see that it wasn’t the best choice for me at the time!
Home buying is often a more emotional decision than a rational one. You imagine yourself cooking in a kitchen designed to your tastes, raising kids in a neighborhood with good public schools, or finally having the space to get a dog or build a backyard deck. But before you fall in love with a vision of how your life could be, make sure you’re looking at places that fit your needs and your budget.
Do the Research
Before you spend your Sundays at open houses, think things over. Where do you want to live? Do you see yourself in a big city, suburb, or rural area? Do you want some room to grow? Do you plan on relocating in the next few years, or are you staying put? Are you willing to move to a different city if you’re priced out of where you live now? What kinds of amenities would you like? How willing are you to renovate a fixer-upper?
Consider these questions deeply before you start browsing through listings. It’s critical that you get a handle on what you want your home to look like and what your finances can handle.
Look at your finances and what you’re currently paying for housing. Play around with a renting vs. buying calculator and understand the annual costs of renting and buying. (Khan Academy has a great video series about this.)
Don’t forget to see what home values are like in your city. A home isn’t always an appreciating asset because of market factors you can’t control, so think of it as a place to live — not as a guaranteed path to riches.
What Do You Really Need?
As part of your research, take a look at your life. Where do you see yourself in the next few years? Do you want the ability to relocate on short notice? Is your job stable? Are you just beginning to build up your savings? Do you anticipate any big changes, like getting married or having kids, that will affect where you want to live and how much space you’ll need?
If you need flexibility, ever-changing space, and the time to save up for a down payment, renting is probably your best bet for now. And renting might be your best bet for a long time! If that is what makes the most sense for your life, ignore the commonly-held belief that owning is the ultimate goal.
On the other hand, if you’ve saved up enough money for a down payment (without touching your emergency fund), if you anticipate staying in the same city for at least a few years, and if you have a good sense of what you need from a home, buying could be a good option for you.
How Much Home Can You Afford?
Calculating rental costs is pretty straightforward. You need to be able to afford the monthly rent, utility costs, renter’s insurance, parking, and potentially an amenity fee to cover the costs of shared outdoor spaces.
If you’re saving up to buy, here are the expenses to keep in mind:
- The down payment. If you put less than 20% of the house’s value down, you’ll need to pay extra for private mortgage insurance (PMI). If you do put less than 20% down and have to carry PMI, you may be able to refinance your mortgage after you’ve built up some equity.
- Closing costs, which are typically 2-5% of the cost of the home
- Moving expenses.
- Homeowner’s insurance. You can bundle this with car insurance to possibly get a better rate.
- Property taxes.
- Potential homeowners association (HOA) fees.
- Renovations and home repairs — your property manager won’t pay to fix the broken faucet anymore!
- New furniture and decor if what you already own doesn’t work in the new space.
Something else that can cost you is the market value of your home. If you fall behind on your payments or the value of the home decreases, you may have to pay for a loss out of pocket when you sell your home — or get stuck staying in the home longer than you want to.
Bottom line: Choose to rent or buy based on rational choices, not emotional ones. Take the time to calculate what you really can afford. Don’t rush into buying a home because it’s what adults do, because you can’t have kids while in a rental home (you can!), or because the market is hot in your city right now. The best time to buy is whenever you’re ready..