When to Consider Buying a Home Instead of Renting

A person holding two wooden houses in their hands with 'rent' over one house and 'buy' over the other depicting the someone considering whether to rent or buy a house.

Homeownership is the most important financial goal many people will achieve. Through buying a home instead of renting, you can build a unique kind of asset over many years.

The decision to become a home buyer instead of a renter is a big one. How do you know when to consider buying a home instead of renting?

Do You Want a Long-Term Investment?

We want to stress “long term” here. Buying a home isn’t a get-rich-quick scheme. A home is primarily a place to live, and shouldn’t be thought of solely as an investment. The wealth-building benefits of homeownership, while real, should be a secondary concern, and homeowners should plan to build equity in their homes over many years.

The goal is to own the home outright by the time retirement comes, so there’s a large monthly expense lifted from one’s budget. It will be much harder to make it through one’s golden years with a large mortgage or rent payment to make. People who own their homes by the time they retire will only have to come up with taxes and insurance to keep a roof over their heads.

There are some circumstances where one can tap into one’s home equity, but we stress being very careful before doing so. Getting a home equity loan or second mortgage is something that should only be considered after talking to a HUD-approved housing counselor and weighing all of one’s options.

Some retired homeowners might consider a reverse mortgage to derive income from the equity they’ve built up in their homes. Fortunately, HUD-approved reverse mortgage counseling is required for those seeking this kind of loan, and that should help those homeowners make the right decision for their unique situation.

Related Article: When to buy Your First Home

Is Your Future Certain and Stable?

If you plan to move in the next few years, buying a home might not be a good idea right now. The initial costs of getting into homeownership might take some time to recoup. Every situation is unique, so we offer a “Buying vs. Renting” calculator on our mortgage calculators page. This can tell you how long you should plan to stay in a home before you would be able to consider selling it.

Learn More: The Differences Between Homeownership and Renting

That’s not to say it’s impossible to move or always a bad idea. Sometimes unforeseen circumstances will force you to move sooner than you expected. Job relocation, medical circumstances, divorce, or other situations can come along and you’ll find yourself putting your home on the market right away. Typically, two years is a minimum time one should stay a homeowner, because selling before that time may mean paying taxes on the money you make from the sale. Homes are excluded from capital gains taxes – as long as you and your home fit the criteria, therefore, be sure and discuss your situation with your tax advisor before you list your home. Even if you have to sell after just a few years and you only break even on the home, it’s probably better than renting, because you’ve spent several years building great credit by making regular monthly mortgage payments. You’ll then find your next mortgage is much easier to get and you’ll have more options for borrowing after having proven yourself as a homeowner.

Are You Financially Ready to Purchase and Own a Home?

Before you can even begin to consider transitioning to homeownership from renting, you have to make sure you are prepared financially.

Are you able to make your rent payments on time every month? Have you ever been late, or had to scramble to come up with those funds? You should be very comfortable in your ability to make those payments regularly before switching from renting to homeownership.

Are you able to save up a down payment? You will want to have some of the money you need saved in advance. You don’t necessarily have to have 20% down, especially as a first-time homebuyer. But 3% of the home’s purchase price at the very least should be realistic for you before considering buying a home. And don’t forget closing costs, fees, moving expenses, utility deposits, and all of the other initial costs of homeownership.

More Resources: 3 Important Steps to Take to Transition from Renting to Owning

Is your credit score good? This part of your finances is really important for those considering a home. You could be making payments for 30 years on a mortgage that will be affected by your credit score. That’s why it’s important to work on your credit and ensure your score is as high as possible before you apply for a mortgage.

Do you have a budget? If you don’t already live on a budget, now is the time to learn how. Start practicing paycheck planning and be ready to live according to a spending plan that ensures you can meet your financial obligations as a homeowner every month.

Do You Know What It Takes to be a Homeowner?

There are many lessons you’ll learn as a homeowner over the years, but it’s best to enter into homebuying with as much info as you can.

If you’re a first-time homebuyer, it’s absolutely critical that you complete first-time homebuyer education. This course will teach new home buyers everything they need to navigate the borrowing and homebuying process successfully, and to be prepared for homeownership after the sale. We can’t recommend this step enough for anyone in the market for a home.

Having a certificate of completion for a HUD-approved first-time home buyer class can also qualify you for down payment assistance or special terms on FHA or other loans, depending on your financial eligibility.

Generally, the sooner one takes their home buyer education course, the better. We often find people come to the class after they’ve already applied for loans and started shopping. But the class helps you with every step of the journey, including comparison shopping for mortgages, so we think the class is the perfect place to start.

Related Article: 10 Tips for Buying a Home in Your 20s

Buying a home is a big step and one that we think can be the most important financial move any family will make. It’s important to make that move early, but only when one is ready. Homebuyer counselors are available to help you ensure that you’re making the right move at the right time for your situation.

Article written by
Melinda Opperman
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over two decades of experience in the industry.

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