A home is one of the biggest financial commitments most of us will ever make - so it's understandable that we might get a little stressed over what seems like a straightforward question:
Should I rent or buy?
To try and ease that anxiety, we spoke with a financial expert and a certified financial planner to get their take on when buying a home is in your best interest.
While there's no universal "right" answer, start your decision process by asking yourself these five questions:
1. Can you afford it?
Having the money for a down payment is only the first step. Next, you need to make sure you can afford to pay your home loan ... and costs like utilities, maintenance, furniture, taxes, and inevitable surprise costs like emergency replacement of the broken boiler.
"Understand what you're getting into," says certified financial planner. "You have to be able to afford to purchase and maintain the property, and expect that your bills will change on a monthly basis."
Plus, she points out, you'll need to be able to pay all of the fees during the buying process. "The best thing you can do is educate yourself," she advises. "If you don't do your research, making the wrong decision to buy could really set you back financially."
Rent if: You don't have the money saved to buy and carry a home.
Buy if: You'll have the cash to cover the initial transaction, plus the ongoing costs of homeownership.
2. Are you financially secure?
To be in a financial position that's secure enough to responsibly to buy a home, you need:
- Decent credit ("You don't need perfect credit or even good credit," he says, "but generally CIBIL score above 650 you can qualify for a conventional loan.")
- A stable income
- Moderate liabilities
- Enough cash on hand to cover down payment and closing costs
- Liquid assets as financial reserves
When expert says "financial reserves," he's talking about an emergency fund. It's not a good idea to scrounge every paisa from each of your accounts for a down payment, leaving yourself without a safety net for an emergency or hobbling your retirement savings.
"I wouldn't recommend that someone without an emergency fund buy a house," cautions most of the experts. "It really sets you up for trouble when you wipe out your savings to reach this goal and don't have any money set aside."
Rent if: You can't check off one or more of the above bullet points, or if buying would completely wipe out your savings.
Buy if: You're financially secure outside of your home savings.
3. What are your other financial goals?
While buying a home is a major financial accomplishment, it's unlikely that it's the only one you ever intend to make. I remember a client and her husband who were "really gung-ho on buying their first home." But after getting a financial plan and seeing exactly how much money they would need to lay out, they decided to postpone their purchase for another few years in order to finance their other financial goals, like starting a business.
"It's all about breaking it down into steps, and getting clear on the numbers," says experts. "If you have any major life transitions coming up, you may want to hold off and see what happens." How will your home purchase affect your pursuit of your other financial goals?
Rent if: You're currently prioritizing other financial goals above homeownership.
Buy if: Homeownership is your primary financial goal, and you're both aware of and comfortable with how the cost will affect your progress towards your other goals.
4. Are you willing to be the super?
This isn't a financial question, but a lifestyle one: If the sink springs a leak, the yard needs to be mowed, the door handle breaks, who deals with it? It won't be your landlord or super, experts points out, so either you'll need to DIY or find the cash to hire someone.
Rent if: You want someone else to step in when things get complicated around the house.
Buy if: You don't mind dealing with the increased chores that come with being your own landlord.
5. Where do you see yourself in the near future?
Different experts have different estimates, but generally, it's recommended that a home buyer spend at least four to five years in a home to offset the costs of buying.
But aside from the numbers, "buying a home is as much an emotional decision as it is a financial one," says experts. "Of course, you must crunch the numbers to determine whether buying makes financial sense, but it's just as important to feel that you're in a place in your life where buying just makes sense. It's no coincidence that most people seriously start considering buying a home when they get married and are comfortable with the idea of settling down and raising a family."
Rent if: You're unsure where you'll be in the near future.
Buy if: You expect to be in the same place for a few years and want to own your home.
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