Unless you’re homeless, you’ve probably noticed that rent in Australia has been through the roof since early 2021. Last year, the median rent price surged by 38% in just 12 months to the end of January 2022. The worst part is that, from the look of things, the only place rent prices are going is up.
If you’re sick and tired of paying a bundle in rent every month, you should consider buying a home. The problem is that house prices aren’t any better. So, when it comes to rent vs. buying a home, which one is better?
Well, join us today and find out. In this post, we’ll be helping you choose between buying a home or renting one.
Start With Your Finances
If you had all the money in the world, you wouldn’t have any trouble choosing between renting or buying a home. Unfortunately, you don’t, but we’re here to help you make the right choice for your current financial situation.
When deciding whether you want to rent or buy, the first thing to consider is whether you can afford the home in question. When it comes to finances, there are a few key figures you need to have down pat. These figures include:
It would be unwise to purchase a home if your emergency savings are somewhat lacking. As a thumb rule, only consider buying a home when you have at least three months’ worth of emergency savings. Otherwise, buying a home might dent your finances and you may be unable to recover.
If you don’t have a considerable emergency fund, you should stick to renting your home. Buying one might be too much of a financial burden.
You can own a home with as little as a 3% down payment. This sounds like a steal, but you’re only sinking yourself further into debt. To avoid drowning in debt, you should only buy a home if you can raise more than 20% of the down payment.
If reading that made you feel a little downcast, we understand. However, if you crunch the numbers, you’ll understand our point of view. A higher down payment will save you a significant amount in interest payments and lower your private mortgage insurance premiums.
Plus, don’t forget, you’ll also have to raise enough money for the closing costs. This is usually around 5% of the purchase price. If you can’t raise more than 20% of the house price as a down payment, stick to renting your home.
Most people can’t buy their own house because of their terrible credit scores. The lower your credit score, the less likely lenders will approve you for a mortgage. If your credit score is less than stellar, focus on improving it before you think about buying a home.
You can rent a home while building your credit score. Once you achieve your credit score, you can start shopping for a suitable mortgage.
Debt-to-Income ratio (DTI)
Your debt-to-income ratio is the fraction of your income that goes towards paying the debt. Lenders use this figure to determine your risk of defaulting. Mortgage lenders will look at this figure to determine whether you’re eligible for a mortgage.
Anything above 36% is a definite no-no for most mortgage lenders. If that’s the case, you might want to rent out an apartment until you improve your DTI.
Think About Your Future
Let’s assume your finances are great, and you can comfortably buy a house with cash. Should you take the plunge and buy a house? Maybe you should, but not without thinking about the future first.
Put some thought into where you see yourself in the next five years. Maybe you have a good job and are planning to stay in that location for good. Maybe you have to get your MBA and are planning to move nearer to your college.
If you don’t see yourself in that specific geographical location in the next five years, consider renting out an apartment. This will give you unmatched flexibility and is a lot cheaper than buying an entire house.
The best part about renting a home is that you can break the lease at your convenience. However, breaking a lease can sometimes be a tad complicated when you have to fulfill a lease contract. Thankfully, there are a few ways to circumvent a binding lease.
Think About Home Maintenance Costs
Fulfilling your mortgage payments and closing it calls for a night-long celebration. But not so fast; you’re not out of the woods yet. You still have an entire structure and all of its systems to take care of.
Maintaining your home can cost you thousands of dollars every year. This amount will go towards maintaining your HVAC, lawn, and emptying your septic tank. If you’re strapped for cash, these maintenance costs might be an unnecessary financial burden.
Renting an apartment means the landlord takes care of all maintenance costs. This includes everything from HVAC maintenance to your refrigerator breaking down. You’ll end up saving the money you would’ve otherwise spent on maintaining your house.
A House or a Home?
You’ve probably heard of the saying, “a house is not a home.” Besides the financial side of things, also consider the psychological benefits of owning a home. You don’t have to worry about rent, and you can have a safe haven to grow and thrive.
On the flip side, your home could also be the source of your misery. This is especially true if you bought a home without putting your finances in order. If you’re set on buying a home, make sure you buy a home and not a house.
Rent vs. Buying a Home: Choose Wisely
When it comes to rent vs. buying a home, the better option depends on your current situation. Remember to take into account your finances and future plans before making a decision. If you’re buying a home, search for some home buying tips online to help you buy the right home.
For more informative content, check out the other posts on the site.