Better option — rent or buy a house?
‘Ask Brianna’ Q&A column
NEW YORK, Aug 23, (AP): “Ask Brianna” from nerdwallet is a Q&A column for 20-somethings, or anyone else starting out. I’m here to help you manage your money, find a job and pay off student loans — all the real-world stuff no one taught us how to do in college. Send your questions about postgrad life to askbrianna@nerdwallet.com.
Question: Paying rent every month feels like throwing money away. Should I keep renting or buy a house?
Answer: I used to want to buy a house so I could have my own garden. Despite my dismal track record for keeping plants alive, I wanted to be able to grow more fresh food than a few sad herbs on a fire escape. With my own house I could also try out all those crafty home renovation ideas I saw on HGTV, I thought, or hang art without having to spackle haphazardly at the end of my lease.
The jump from renting to owning is a huge financial step, not just a change in lifestyle. You’ll need a potentially hefty down payment, solid credit and a plan to live in the same place for long enough to make buying worth your time and money.
Three-quarters of renters ages 18 to 39 say owning a home is better than renting because it’s a solid investment and protects you from rent increases, according to the May 2014 Fannie Mae National Housing Survey , but that’s only true once you’re financially secure enough to buy. That means for me, a garden will have to wait. Here’s why.
You’ll need to stay put for a while: Sure, renting feels like “throwing money away.” But when your lease is up, you have the option to move to a different neighborhood, get your own place without roommates or cram your stuff into a storage unit and travel the world. Owning a house doesn’t come with that flexibility. Buying and selling a home is a complex, expensive process that includes closing costs and a real estate agent’s commission that could be between 5 percent and 6 percent of the property’s price when you sell. It generally makes financial sense only if you plan to stay put for at least five years, says Leslie Ransom, a financial planner in Chicago. You can’t always count on the home’s value to stay the same or increase, meaning you could lose money if you sell soon after buying.
Renting may be a better option for you right now, and there’s nothing wrong with that — even if the American dream has you thinking you haven’t made it until you’re a homeowner. “What you need in a home is going to change,” Ransom says, especially when you’re in your 20s and early 30s. Maybe you’re not sure you can deal with your city’s subzero winters long term, or you might want to move closer to your parents as they age. Maybe you’ll be desperate for more space as you get married and have kids, and you’d rather wait until you can afford to buy a bigger place.
You’ll need serious savings: Another big consideration should be the mammoth cost of buying and maintaining a home. A traditional down payment is 20 percent of a home’s price. The median price of existing homes reached a record high of $247,700 in June, according to the National Association of Realtors, so I don’t blame you if your jaw hits the floor at the idea of a $49,540 down payment.