Rent or Buy? Budget Considerations When Weighing Housing Options

Home Buying

As life happens and you climb your personal career ladder, you may find yourself looking for your next housing move. If you are in a conundrum on whether to rent or buy, here are budget and other considerations to keep in mind.

Determine how much you can afford. Most prospective homeowners can afford to purchase a property that costs between 2 and 2.5 times their gross income. Another rule of thumb is that your mortgage payments over the course of a year should not exceed 28 percent of your gross income.

Qualify for a mortgage with a lender. There are many factors a lender will consider, including your monthly income, debt and how long you have been in your job.

Check out a renting versus buying calculator online. Once you have discovered your ideal home price and mortgage amount, utilize online tools that consider these numbers as well as factors such as property taxes and length of stay, in analyzing whether renting or buying would be the best financial decision for you. Don’t rely solely on these results as your focus should include your personal needs and goals.

Decide where to live. Think about if you want to live in the city, the suburbs or a rural area. Consider your transportation needs, especially if you rely on public transportation. Certain urban housing options may be cheaper to rent rather than to buy.

Consider how long you are going to stay in that location. If you plan to stay more than five years, it may be a good decision to buy. If you are looking for more flexibility, renting gives you more freedom to move to a new location when you desire – especially if you will only be in that city or town for a short time.

Factor in potential extra costs. When buying a home, the down payment and any closing costs need to be considered, as well as fees for professional services that support the home-buying process. Generally, down payments are made upfront and can be anywhere from five to 20 percent of the purchase price. Closing costs also hover around an additional five percent of the purchase price. Also consider property taxes on the home, as they are often a significant expense for homeowners.

What are the financial benefits of homeownership?

By owning a home, you can take advantage of various tax benefits including the mortgage interest deduction and mortgage tax credit. Additionally, a home offers the advantage of building equity. Another benefit and defining moment for many is realizing the flexibility to personalize your home as an owner. With a rental, your possibility to add those personal touches may be limited.

What are some benefits of renting?

In competitive or extremely expensive real estate markets, renting may be the best option. However, if homeownership is your goal, renting may also help you save money for a down payment on a home. Renting typically provides a fixed-dollar cost for monthly expenditures, maintenance and repairs. When you own a home, you are likely responsible for those additional expenses.

For those looking to reside in Atlanta, the Atlanta Journal-Constitution revealed recent data showing the inventory of homes for sale in April represented 2.2 months’ worth of sales. A healthy, balanced market, the article stated, has six or seven months of inventory. Essentially, this tightening of inventory is leading to rising prices. That’s good news for homeowners planning to sell, but more complex for those interested to buy.

Ultimately, the fluctuating real estate markets and your financial interests should be top of mind when deciding whether to rent or to buy. Enjoy weighing your options and deciding what the best choice is for you.

Kristen Fricks-Roman CFP®, CRPS®, is a financial advisor and senior vice president at Morgan Stanley Wealth Management, Atlanta. She can be reached at [email protected].

kristen-fricks-romanKristen Fricks-Roman CFP®, CRPS®, is a financial advisor and senior vice president at Morgan Stanley Wealth Management, Atlanta. She can be reached at [email protected].

The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Morgan Stanley Smith Barney LLC and its Financial Advisors do not provide tax or legal advice. Individuals should seek advice based on their particular circumstances from an independent tax advisor. Morgan Stanley Smith Barney, LLC, member SIPC.

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