Realtors often use the argument that it is critical to own a home because it is one of the best ways to build wealth and choosing to rent is essentially throwing money away every month. This assertion is used to inspire individuals to purchase a home but it begs the question as to how true is the claim that homeownership is essential.
The first step to answering this question is to understand that purchasing a home should not be looked at as a purely financial decision. There are many benefits and disadvantages which come along with homeownership outside of generating wealth.
Purchasing a home will typically determine where you will live for the near future. This provides additional security in the form of never being forced to move but makes it much harder to pick up and leave on a whim. Another difference is having the ability to customize and make improvements to the property.
Additionally, you will now be responsible for all the maintenance associated with home upkeep. It is also very typical for homeownership to be more time-consuming than renting. When something breaks, it is your responsibility as the homeowner to fix it whereas if you are renting, you can just call the landlord and have them take care of it. Homeownership will also factor into deciding whether to make other major life decisions such as changing jobs or having kids.
Historically, renting vs buying has been a straightforward decision. It is possible to run a break-even analysis to determine whether you expect to be better or worse off financially through owning a home. The drawback of this analysis method is that it is forced to utilize many different non-constant assumptions such as the expected inflation rate, home appreciation rate, cost of financing, alternative market returns, etc. For example, in the current economic environment of higher interest rates, any homeowner who had locked into a low rate may have an overall mortgage payment that is cheaper than renting a similar property.
One of the most important factors in this analysis is the anticipated length of ownership. Generally speaking, the longer someone decides to occupy a residence, the more financial sense it makes to buy real estate.
While there are no guarantees, a good common rule of thumb is that if you plan to reside somewhere for at least 3 years it likely makes sense to explore purchasing a property if you are able to comfortably qualify and afford a mortgage payment.
Deciding on whether homeownership is right for you, needs to account for all the non-monetary effects coupled with the financial ramifications. At Bluefire Mortgage, we can help navigate the decision to see what the right path forward is for you. Feel free to contact our office at (760) 930-0569.
