Buying vs Renting: Where to Live When in Debt

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Buying vs renting is one of the most important financial decisions you will make after graduating from college.

Renting has a much lower up-front cost but leaves you with no equity when you decide to move.

Buying gives you ownership, but there are other homeowner expenses in addition to your mortgage. And you have to save up a big down payment to start before you purchase a home.

Here’s the best approach to take while paying off student loans and other debts.

Saving for a down payment vs paying student loans

In most cases, a buyer should save 20% of the home’s value for a down payment when looking to purchase a home. That is $20,000 saved for every $100,000 in home price. For example, if you are looking to buy a $200,000 home, you should have $40,000 saved.

Saving $40,000 is no small feat on its own. The average American brought in $44,600 in 2014, and an average priced home in the United States is just under $240,000 as of May 2016. So a down payment for a home in the U.S. could amount to more than one year’s salary for many Americans.

Saving up to that level when you are paying hundreds of dollars towards student loans per month is not all that practical. If you can start an automatic savings plan just for a home down-payment you will get yourself on track to buy in the future, even if you can’t today.

Renting vs buying a home

Unless you can afford to buy a home in cash, you will have a monthly mortgage payment each month after buying a home. Most mortgage payments include a loan payment, property taxes, and homeowner’s insurance wrapped into one payment.

The higher your down payment, the lower your mortgage. So saving for a bigger down payment than 20% can save you money each month after you buy. Like your student loans, your monthly mortgage payment is based on how much you borrow.

You can put $40,000 down on a $200,000 home for a $160,000 mortgage with a monthly payment around $757 per month. If you put down 30% (or $60,000) instead, you would have a $140,000 mortgage and $662 payment per month. That is about $100 less per month!

If you have a big enough down payment on a home well within your budget, you might be able to save money each month on your housing payment by buying a home instead of renting.

What you get when you leave: buying vs renting

When you leave an apartment, you get your security deposit back, hopefully, but that’s pretty much all. Every payment you made was an expense. You were paying for a home and you had a place to stay. That is far as the financial implications go.

If you own a home, you could make money or lose money when you leave. If the value of the home increases while you live there, you could get a big lump payment back when you sell. After paying off your mortgage and selling costs, you get to keep everything else.

However, property values come with some risk. As many Americans experienced during the Great Recession, housing prices can fall, sometimes dramatically. A house market drop could result in losing money compared to the down payment you paid when you bought the home.

I have owned two homes: a condo in Denver and a house in Portland. I made a good profit when selling both homes due to a combination of a great local real estate economy and buying at the right time.

In some cities like Detroit, many homeowners saw the value of their home drop with a poor real estate market and never recovered.

Monthly rent vs monthly mortgage payment

As a homeowner, your monthly payment is based on the size of your mortgage, the interest rate, and how your loan is structured.

If you choose a 30 year fixed loan, one of the most popular “conventional mortgages,” your payment never changes as long as you have the loan unless you decide to refinance.

As a renter, your payment is up to your landlord. Your monthly rent is locked in as long as your lease is valid.

However, your landlord has the option to raise your rent or force you to move out early in your lease terms, or as permitted by local law. At the end of your lease, they can make you leave or dramatically increase your rent.

Portland has seen the highest rent increases in the nation recently, and I was protected from rent increases as a homeowner. Renters saw an average 14% rent increase last year, an increase of $160 per month. My mortgage payment, however, was fixed, so I never had to pay any more while I lived there.

These are some scenarios to keep in mind when deciding on buying vs renting a home.

How long do you plan to stay?

When you’re renting a home, you generally only have to pay moving expenses, an application fee, and a cleaning fee when you leave. When purchasing or selling a home, you may pay a slew of fees and costs, including up to 6% of the home’s value to a realtor.

Additional items such as title transfer fees, taxes, bank charges, and other expenses can amount to thousands of dollars in additional expenses.

If you plan to live in a home for at least seven years, you will typically make up the home purchase and sale costs. If your home value increases, you can make it up much faster.

In the end, it really depends on the local real estate market and your loan terms when deciding on buying vs renting. It is impossible to know how the market will perform for sure, so work with a trusted real estate agent to decide if buying makes sense.

Buying vs renting: everyone’s needs are different

Everyone’s student loans, finances, and local real estate is different, so there is never a right or wrong answer here. The best decision is the one that makes the most sense for you.

Work with a trusted local banker to decide how much you can afford to pay for a home, or if a mortgage doesn’t make sense. Then, look at the local market to understand what you can afford, and decide if renting meets your needs better.

Buying a home is the biggest financial transaction most people ever make in their life, so don’t rush into a decision. Weight the pros and cons and look at your finances to decide if buying vs renting a home is right for you.