During periods of high inflation, obtaining a mortgage to purchase a house can be challenging. The elevated mortgage rates mortgage rates make it tough for buyers to afford homes, so many folks end up sticking with renting instead. This leaves us wondering which path is the better one. With housing prices climbing sky-high, finding that perfect time to jump into the market feels like trying to catch a unicorn.

This puts renters in a tricky spot, especially because there’s this common belief that renting means throwing your money down the drain while homeownership is the golden ticket to building wealth.

But here’s the thing: are there situations where renting actually makes more sense than buying? Well, it all depends on your personal financial goals. To make the smartest decision, you’ve got to consider a bunch of factors. Think about your own financial situation, what the real estate market looks like in your neck of the woods, any plans you might have to relocate soon, and other stuff that’s relevant to your situation. When you take all these things into account, you’ll have a clearer picture of which option suits you best. So let’s dig deeper into these factors and get you some answers.

Personal finances

When it comes to big financial decisions, like renting or buying, knowing where you stand financially is super important. You need to have a clear picture of your money situation. And it’s not just about having a good credit score so you can score that greatrental or qualify for a mortgage. It goes deeper than that. You need to get a grip on your budget, know how much money you’re bringing in, what you’re spending it on, and if you’ve got any debts hanging around. Understanding all of this will set you up for smart long-term planning. So, take a good look at your finances and get ready to make some informed decisions!

Location stability

Are you planning to settle down in your current neighborhood for the long haul, or do you have some relocation plans in the next five to ten years? Buying a home is a long-term commitment, typically involving mortgage terms that extend for around 30 years. So, if you need flexibility and the freedom to move around without a hassle, renting might just be the way to go. It gives you more options to pack up and go whenever you please.

Current real estate markets

Costs associated with the rental and housing market can vary from city to city but in most cities, the amount you pay per month is likely to be lower if you rent than if you buy right now‚ including in markets where it’s traditionally been the opposite. That’s largely because mortgage rates have doubled in the last year or so. That said, conduct thorough research on the real estate market in your specific city if you have a strong desire to purchase a property, and working closely with a financial advisor can help you devise a solid financial plan to turn your homeownership goals into a reality.

The benefits of renting

When it comes to buying a house, we often think about the advantage of building equity. Homeowners can sell their property for a profit once they’ve paid off their mortgage, treating the house as an asset. That’s why renting is often seen as “throwing money away.” But the truth is, not all homeownership costs actually build equity, and not all properties increase in value.

On the other hand, renting offers a sense of predictability when it comes to expenses. With a rental, you generally have a fixed amount for rent, insurance, and other costs for the duration of your lease. These expenses only change when you negotiate a new agreement. Homeowners, however, face uncertainty when it comes to payments beyond their mortgage and basic bills. They can be hit with unexpected home repairs, property taxes, and insurance premiums—all of which can add up quickly, as we’ll discuss further in the next section.

Remember, renting also gives you the flexibility to choose your location. If your lifestyle or career demands frequent moves, renting is likely the smarter option for you.

The benefits of purchasing

Owning a home is all about finding comfort, embracing your lifestyle, and making long-term plans. But before you dive into the “build wealth” mindset, there are some important financial considerations to keep in mind.

Let’s take John as an example. He snagged a sweet deal on a $100,000 house. His first payment is the down payment, which typically ranges from 3% to 5% of the home’s total value. Luckily, John is financially well-off and can comfortably drop 10%, which amounts to $10,000. He then takes out a mortgage for the remaining $90,000, with an annual interest rate of 4% over a 30-year period. Since John has a stable income, a solid credit score, a history of timely bill payments, and a low debt-to-income ratio, his loan gets approved faster than you can say “home sweet home.”

Now, keep in mind that John’s situation is unique to him. While a larger down payment can be more beneficial in the long run, not everyone can swing it within their financial means. Plus, different factors like income levels, credit scores, payment histories, and existing debt can impact the value of your approved loan and the interest rate you’ll get.

But wait, there’s more! Once John becomes a proud homeowner, there are other fees waiting for him. We’re talking about property taxes, water and sewer services, repairs and maintenance, homeowners insurance, and possibly extra charges like trash pickup, pest control, pool cleaning, and the list goes on.

So, while homeownership gives you a shot at building equity and potentially selling the house for a profit, it also comes with a bunch of financial strings attached. However, if your grand plan involves settling down and building a life in the area, the comfort and stability of homeownership might just be the perfect fit for you.

Which to choose?

Ultimately, the key factor to consider is your vision for the future. The expenses associated with renting and buying heavily rely on the specific location, while the advantages revolve around your present way of life. If your plans involve relocating within the next five years, renting is likely to be a more cost-effective and convenient option. On the other hand, if your goal is long-term stability and personal comfort, purchasing a home would be worth considering. Of course, your financial circumstances play a crucial role in this decision-making process as well.

Need financial advice?

Check out our previous blog post The True Price of Convenience. In addition, if you need personalized financial advice, our team is always here to help—contact us today to book an appointment!