Should You Rent or Buy?

On average homeowners gained about $51,500 in equity in the last year

The cost to rent is on the rise nearly everywhere, and growing much faster than before the pandemic.

The financial impact of homeownership, too, has been influential the past several months.  CoreLogic’s Homeowner Equity Insights report reveals that U.S. mortgage holders have enjoyed an equity increase of 29.3% this year.  This equates to big dollars, as “the average homeowner gained approximately $51,500 in equity during the past year.” 

Wisconsinites, on average, realized a $28,000 home equity gain.

The choice to buy or rent is a uniquely individual one, however, and consumers should carefully consider whether the time to buy right now is in their best interest—for both financial and emotional reasons.  It may be advantageous to lock in housing costs with the certainty of a 30-year mortgage for someone inclined to remain in a particular area, for instance, while it may be advantageous for another potential homeowner to postpone a property purchase in favor of growing a down payment.

Five important questions to think about when deciding to rent or buy, according to Fidelity Investments, are:

·         Can you afford to buy a home?  Think about your earnings, down payment, credit score, and other financial responsibilities.  Especially in today’s competitive buying market, it is important your finances are solid to make a strong offer.

·         How long do you intend to live in your home?  “If you’re planning to stay less than 3 years, it probably doesn’t make financial sense to buy.”  This is because the longer you remain in your home, the longer time you have to recover expenses like fees and insurance—and your home has more time to increase in value.

·         Consider best housing values in your community.  Even though overall rents are up across the nation, it pays to look at circumstances in your area.  Consider similar properties in your assessment.  Determine a price-to-rent ratio by multiplying the monthly rental cost by 12 to get an annual figure.  Divide the purchase price for a similar property by the yearly rent amount.  “A ratio greater than 20 generally weighs in favor of renting, while a figure less than 20 generally favors buying.”

·         What happens if the home’s value remains stable?  There is no guarantee that a home’s value will go up in a certain timeframe, even though that is typically the case.  How will you feel if the value remains the same or if inflation goes up faster than the value of your house?

·         How do you feel about making the emotional investment?  Homeownership demands commitment.  You will be responsible for upkeep and surprise maintenance items.  Homeownership is also a source of “pride and satisfaction,” so you want to be comfortable with your choice.

Owning a home can be financially advantageous, as the last several months have indicated.  However, potential buyers need to remember Fidelity’s advice when determining if the timing is right to make a purchase: “Ultimately, the numbers can help you decide, but they can’t decide for you.”

Post authored by Lora Bray.

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