Buying a home is part of the American Dream, but that doesn't necessarily mean it's the best choice for you.
For decades, the conventional wisdom has been that buying a house makes much better financial sense than renting one. After all, you'll have to spend a large chunk of your income on housing either way, so doesn't it make more sense to invest that money in something you'll eventually own, rather than simply forking cash over to someone else?
However, a number of factors can make renting a much wiser financial decision than buying. Here are four good reasons why it may be smarter for you to rent instead of buy.
1. You're not staying in the home very long
The sooner you intend to move, the less sense it makes to buy.
If you plan to stay put for less than two years, then buying a house would be a poor investment. In such a sort amount of time, the home likely wouldn't gain enough value to make up for the costs of buying and selling it, like realtor commissions, closing fees, moving expenses, and so on. And don't forget that buying or selling a house is a huge hassle compared to switching from one rental to another.
2. You're in an inflated housing market
Some parts of the country are prohibitively expensive to live in. Coming up with a down payment for a $500,000 house is considerably harder than coming up with a down payment for a $150,000 house. But what makes certain highly desirable urban areas really problematic is that home prices in these areas can be driven steeply upward by the high demand. Not only would you have to pay an inflated price for the house, which makes it harder for you to turn around and sell it for a gain in a few years, but you'd also have to pay far more each month as a homeowner than you would as a renter for the same amount of house.
3. Your income isn't secure
If you're not confident in your job security, then now is not the time to make a huge purchase like a new house.
If you suddenly lose a major source of income, then you may need to cut your housing costs in order to get by. That's a relatively quick and painless process if you're renting; you might pay a fee to end your lease early, but you could move to a cheaper home in a matter of days. If you own your home, then a career crisis could force you to sell your house at a bad time; it may take months to find a buyer, or you might end up selling the house for less than you paid for it.
4. You have no savings
If an emergency savings account is important for a renter, it's absolutely crucial for a homeowner. As a renter, if something goes wrong with the house, you can simply call the landlord, who will have to pay to fix the problem. As a homeowner, all the expense lands squarely on your shoulders. Even if nothing expensive breaks down on you, homeowners have ongoing additional costs such as homeowner's insurance and property taxes.
If you don't budget for such expenses or run short one month, you may end up having to tap into savings to pay for them. And if you don't have a well-funded savings account, you may be forced to turn to credit cards -- and that repair bill will be made even more expensive by interest and possibly fees.
Also don't forget that ponying up a down payment will take a big bite out of your savings. You'll need to make sure you still have a solid emergency fund after you've paid out the down payment and the cost of moving. After all, what's the point of buying home if you'll be too busy fretting about expenses to enjoy it?
The Motley Fool