Mortgage Application Process - When shouldn't I apply?

Buying a home is probably the largest purchase you’ll ever make. It may be the most exciting, too. But sometimes it is better to rent.  How do you know which is better for you - renting or buying?

At first, it may seem like just a numbers decision - “Can I afford a home?” - but there are also a lot of emotions  - fear, commitment, responsibility - that go along with buying a home.

I know when I made the switch from renting to owning, I instantly felt more mature. I didn’t sleep in on the weekends any more because there was always something to do around the house. I had responsibilities. But it also made me feel much more settled; I’d finally picked a place to call my home.

So how do you know when it’s the right time to buy?

Years ago, the general thinking was that it was always the right time to buy because buying a home was the best investment you could make. In today’s housing market, that’s not necessarily true. Today the thinking is that the older you are, the smarter it is to buy, while for younger people, it’s smarter to rent.

If you’re in the process of making this decision, look at these two things first:

The Financial Piece

Let’s say you’re paying $900/month for rent and you’ve done a little research and figured out that the home you can afford will make your monthly payments $1,500/month (including taxes and insurance). Before you go out and buy something, spend six months putting that extra $600/month into a savings account and see how that affects your day-to-day finances. Can you still afford to do everything you want or are you struggling at the end of every month? If you did ok, great! Not only have you learned that you can comfortably afford to buy, but you’ve also put aside an additional $3,600 toward your downpayment.

The Emotional Piece

Renting gives you a lot of flexibility and freedom. You can come and go as you please, and you’re not responsible for any upkeep, lawn work or for replacing the hot water heater when it breaks.  If you get a job transfer, a new roommate or decide to live in a new city, picking up and leaving is relatively easy. Owning on the other hand, comes with lots of responsibilities requiring both your time and money.

Owning or renting: which is smarter? You may often hear that when you rent you’re just throwing your money away, where buying means you’re investing your money. When you finally sell, you’ll get it all back and hopefully more. In a perfect world, that’s true. But which is actually cheaper? To find out, compare the costs for both this way: Compare your rent payment to the portion of your mortgage payment that would go toward the interest because that’s the part you’ll never get back.

Another way to evaluate which is smarter for you is to apply the rent ratio.

Divide the purchase price of a home by the annual cost of renting a similar home. Some experts recommend using the number 20 as your measuring point. If the ratio is above 20, consider renting instead of buying.

If the ratio is below 20, buying may be an option you should look into, especially if you plan to stay in the home for more than five years.

For example: a home you love is selling for $175,000. Your research reveals the average rent for a comparable home is $1,200 per month, or $14,400 per year. The ratio for this scenario would be $175,000 ÷ $14,400 = 12. This ratio is well below 20, so buying may be a good option.

What’s the bottom line?

If the financial part works, you’re willing to stay in one place for a number of years and you’re in the right frame of mind to take on all the responsibilities of home ownership, go for it! If not, that’s ok. Enjoy the freedom that renting gives you and reassess in a couple of years when your head and wallet may be in a different place.

Hanscom FCU can help you start your home search online.

For more tips on buying a home, download our new First-time Home Buyer’s Guide by clicking below.

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About Author

Bill Burpeau
Bill Burpeau

Bill Burpeau is a Financial Wellness Coach at Hanscom FCU. As a Credit Union Certified Financial Counselor, he is an enthusiastic advocate of everyone being engaged in their financial health, educated and empowered to make the best financial decisions for themselves every day. He constantly studies and is up to date with the latest financial management concepts and technology. Bill is a graduate of Texas A&M University with a BBA in Business Management and served in the U.S. Navy as a Supply Officer.

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