Homeownership has long been considered a symbol of the American dream. For many, finally buying a home is proof that they have achieved the dream. But how do you know that it makes financial sense to buy your very own property? These four questions can help you decide if you should continue to rent or to buy a home.
1. Do I plan to stay put for at least five years?
The “five-year rule"1 is a good guideline for deciding whether or not you should buy a home. If you plan to own the same house for a minimum of five years, you should at least "break even," when you compare the money you spent on the down payment and closing costs vs. your home value's appreciation (assuming you take out a 30-year fixed-rate mortgage and your home appreciates at a standard rate of about 6% annually2). However, if you move sooner than that, the closing costs you initially paid and the higher interest payments associated with the earlier years of your mortgage (a result of amortization3), may mean you may lose money — unless the housing market suddenly escalates beyond the norms where you live.
Tip: Tax benefits to owning a home include the ability to deduct mortgage interest, property taxes, and other expenses from your income.
2. Am I prepared to handle my own home repairs and maintenance?
One of the nice things about renting a home is that you have a landlord to fix your leaky roof and replace the faulty water heater at no cost to you. Owning a home, on the other hand, means you're responsible for these types of repairs and maintenance yourself. And unlike the fixed expense of your mortgage payment, you never know when you might need to spend extra money on home repairs.
Another good rule of thumb for homeowners is to set aside 1% of your home's value4 each year for maintenance. For example, if you bought your home for $300,000, you should have $3,000 in the bank for unexpected repairs and ongoing maintenance.
3. Have I saved enough money for a down payment on a home?
Even though a mortgage can take a major purchase like a home and spread the payments out over time so they're affordable, there's still a significant investment required up front. It's a good idea to have a down payment of at least 5% to 10%. If you can put down 20%, though, then you can skip paying private mortgage insurance(PMI); otherwise, you'll have to pay for PMI as part of your monthly mortgage payment until you've reached 20% equity in your home.
4. Do I understand the tax implications of owning a home?
As mentioned, there are tax benefits to owning a home,5 including the ability to deduct mortgage interest, property taxes, and other expenses from your taxable income.6
Unfortunately, you're also required to pay taxes on your home. Property taxes,7 which are calculated as a percentage of your home's value, will vary depending on where you live.
Clearly, the decision to rent or buy a home depends on many factors. There's no cookie cutter answer that works for everyone. You'll have to evaluate your financial situation, lifestyle, and goals to decide what's right for you. But to make the decision easier, you can use this great rent versus own calculator8 from the New York Times to crunch all of these numbers and figure out if owning or renting a home is better for your situation. And if you have specific questions about whether you're ready to purchase a home, you can always speak with one of our Synovus Mortgage Specialists. Just click here to find one near you.
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
Moneyning, "The Five Year Rule for Buying a House," http://moneyning.com/housing/the-five-year-rule-for-buying-a-house, accessed April 26, 2018.
Investopedia, "The Truth About Real Estate Prices," October 24, 2017, https://www.investopedia.com/articles/mortages-real-estate/11/the-truth-about-the-real-estate-market.asp, accessed April 26, 2018.
Investopedia, "Amortization," https://www.investopedia.com/terms/a/amortization.asp, accessed April 26, 2018.
The Balance, "How Much Should You Budget for Home Maintenance?" Paula Pant, April 7, 2018, https://www.investopedia.com/terms/a/amortization.asp, accessed April 26, 2018.
Tax Policy Center, "Briefing Book: What Are the Tax Benefits of Home Ownership?" http://www.taxpolicycenter.org/briefing-book/what-are-tax-benefits-homeownership, accessed April 26, 2018.
Investopedia, "How Property Taxes Are Calculated," Chris Seabury, https://www.investopedia.com/articles/tax/09/calculate-property-tax.asp, accessed April 26, 2018.
The New York Times, "The Upshot: Is It Better to Rent or Buy?" Mike Bostock, Shan Carter, and Archie Tse, https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html, accessed April 26, 2018.
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