When weighing major life decisions, everyone seems to have the answer. You should marry this person, drive that car, and have so many kids - all by a certain age. Never mind if it's actually the best choice for you!
Home ownership is no different. Deciding whether to buy or rent always comes with a generous helping of opinion. So how do you separate fact from fiction?
Let's start by breaking down three common myths.
Myth #1: Buying a home is the grown-up thing to do.
Many folks look at home ownership as a rite of passage into adulthood. According to the National Association of Realtors, the typical first-time home buyer is 31 years old. So if you're 25 and feel like you're behind the curve because you haven't bought a home yet, stop worrying. There's no reason to rush into a big purchase just because friends or family tell you it's what you're supposed to do. Real grown-ups know it's not the money-smart choice in every situation.
During times of transition, renting for a year or two gives you time to get your feet on solid ground before making a life-changing decision. Here are a few examples:
- You just graduated from college and aren't ready to plant your roots in one place yet.
- You moved to a new city and aren't sure which neighborhood is right for you.
- You're in the military and don't want to lose money on a home every time you're stationed in a new place.
Dave also recommends waiting at least a year after getting married to buy a home. After all, it takes a year of being married to know how close to your mother-in-law to buy. Spend your first year getting to know each other and learning how to manage your money well as a team. You have until "death do you part" to take your next big plunge!
Myth #2: It's stupid to pass up a good deal when the market is hot.
You found the perfect home, and the sellers are practically giving it away. It just might be the deal of the century. Even though Sallie Mae's got her clutches on your pocketbook, you'd be dumb to walk away, right?
With real estate, you make money by buying the right thing at the right time - not by taking advantage of the market.Never buy a home based solely on the market. Buy when you're financially ready. Here's how you know you can afford it:
- You're out of debt.
- You have 3 - 6 months of expenses in your emergency fund, plus enough cash for a 10 - 20% down payment on a 15-year fixed mortgage.
- You're paying cash up front, or your mortgage payment is no more than 25% of your monthly take-home pay.
Jumping into home ownership with debt and no emergency fund is like diving into a pool with no water. You're sure to hit rock bottom. First the A/C breaks, then the roof leaks. Next thing you know, you're turning to credit cards and loans to pay for it all - and the hole you're in just keeps getting bigger.
There's nothing wrong with renting while you work to get your finances in order. In fact, Dave encourages it! Take time to lay the right foundation before you take the leap, and your home will be a blessing instead of a curse.
Myth #3: Renting is cheaper because there's no upkeep.
Whether or not you should rent or buy a home may seem like an apples-to-apples comparison if you look at monthly costs alone. In that case, home ownership often tips the money scale because you pay for maintenance, taxes and homeowner's insurance on top of your mortgage payment. Long-term costs, however, paint a different picture.
According to Trulia, if you bought a home today and lived there for seven years, you'd save 38% compared to renting. Why? Because you've got inflation on your side. When you own a home, you don't have to worry about the landlord jacking up your rent each year. Your monthly costs are essentially locked in for as long as you live there. As your home's value goes up and your mortgage principal goes down, that's money in your pocket down the road.
Rent, on the other hand, rides the wave of inflation, and research shows it's taking up a growing portion of income in many major cities. According to Zillow, the cost of rent grew twice as quickly as household income between 2000 and 2014 and currently makes up nearly 30% of renter income. That's 5% more than Dave recommends spending on housing costs!
Get Advice You Can Trust From a Pro
Deciding whether or not to buy a home isn't an easy choice. That's why it's smart to partner with a trustworthy pro who can help you navigate your options. Ask your real estate agent to show you a buy vs. rent analysis based on your specific market and financial situation.
Information provided by Dave Ramsey