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Decision of Buying a Home or Renting for a While

When it comes to deciding whether you are going to buy a home or rent, there are two major schools of thought.  The first is that any money spent on rent is money thrown away.  The other comes from those who will say you should rent until you can afford to buy (if you ever buy at all).  I believe there is a simple test that will help you determine whether you should rent or buy.  I’ve found that from a logical thinking standpoint, if you can answer yes to the following five questions, you are probably ready to buy a house.  Otherwise you may want to continue renting for a while.

  1. Are you willing to live in the same place for a minimum of five years?  By the time you pay closing costs and other fees/costs associated with buying and decorating a home, you’re going to have some money invested.  Unless the housing market goes up very quickly, you’re probably going to need a few years to recoup those costs and be okay to pay the fees associated with selling the house if/when you decide to move.
  2. Do you pay all your bills on time?  If you can’t steadily pay your bills on time each month, every month, you may be getting yourself in over your head to buy a home.  Especially if you have a mortgage, foreclosure on a home you bought is a heck of a lot more serious, costly and painful than eviction from a rental.
  3. Are you living on a working budget?  If you are not living on a budget that allocates all of your income each month, you need to start NOW.  Once you’ve set up your budget, you need to live on it for at least a few months to determine how much money you can really devote to housing.  When you buy, you’ll have a home loan (probably), plus utilities, maintenance, taxes, etc.  Don’t just expect to have a single monthly payment and be done with it.
  4. Do you have several thousand dollars you can put toward a down payment?  It doesn’t matter whether you have excellent credit or not; if you don’t have lots of money to put down (ideally, 20% of the home’s value so you can avoid paying private mortgage insurance, PMI), you are going to have a more difficult time obtaining mortgage financing and you may find yourself in a home with payments too high if you fall into a situation that reduces your income.
  5. Are you willing to live in something you can honestly afford to buy?  I strongly suggest a low interest mortgage payment that is no more than 30% of your monthly net (take-home) pay.  Figure out how much you make on a normal month and multiply it by 0.3.  That amount is the maximum I’d consider as your home mortgage payment.  Go to a bank and find out what that translates to in a total loan amount (on a 15-year, fixed rate mortgage loan).  Then if you can look at houses in that price range and determined if you are satisfied with what you can afford to buy.
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