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Should You Buy a Home or Keep Renting?

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Bank of Hawaii

Bank of Hawaii

Buying a home is a big financial move. Although it can really pay off in the long run, it’s also not necessarily the right decision for everyone. There are many factors to consider, including your income level, how long you intend to stay in one place, and so on.

Is becoming a homeowner right for you? Or does it make more sense to keep renting? There’s no definite right or wrong answer; it depends on your unique financial situation and your priorities in life. Below are a few pros and cons of both buying and renting that you can consider, as well as a list of questions to ask yourself before making a decision.

Buying a Home

Pros:

1. Your home becomes an investment in which you build equity.

Think of buying a house as having a long-term nest egg. Instead of paying monthly rent to a landlord, making payments on a mortgage each month builds equity in your home, creating a kind of automatic savings account. You can borrow against this equity if you need access to cash, or you can sell your home later—most likely for a profit, considering that real estate in Hawaii generally appreciates in value over time.

2. Your monthly fixed-rate mortgage payments remain mostly the same.

Although property taxes and homeowners association fees may change over time, the monthly payment you make on a fixed-rate mortgage won’t increase. The same cannot be said for rental rates, which generally increase between 3 to 5 percent per year. (In Hawaii, where demand for housing is high, these annual increases can be even higher.)

3. You can’t be evicted.

If the owner of a rental house or apartment decides to sell their property, lease to someone else or even move in themselves, renters can be forced to move out. But when you’re the owner, you don’t have to worry about eviction letters or the stress of having to find a new place to live on short notice.

Hawaii is relatively flexible when it comes to eviction notices to vacate, with landlords required to give 45 days notice (most states only require 30 days). However, given Hawaii’s competitive housing market, finding a new home in the same neighborhood or with similar benefits, such as accommodating pets, can be difficult.

4. You can create the home of your dreams.

Want to repaint the walls in your bedroom or replace the living room carpet? As a renter, you can’t make major changes like this without risking your security deposit. But as a homeowner, you can make nearly any changes you like, without having to ask permission.

Cons

1. You’ll have higher upfront costs.

To purchase a home, many banks or lending institutions require a down payment of 20 percent of the total purchase price of the home. Even for first-time homebuyers who qualify for a Federal Housing Administration (FHA) loan—which only requires a 3.5 percent down payment—that down payment could still add up to tens of thousands of dollars.

There are also additional costs and fees when closing a mortgage that need to be paid—normally ranging from 3 percent to 5 percent of the total purchase amount. All this adds up to more than you’d need to rent a house or apartment (generally first-month’s rent plus a security deposit).

2. You’re on duty for repair and maintenance.

If something breaks in your home, as the home owner, you’re the one responsible for fixing it. You’re also in charge of preventative maintenance to keep your place in good condition. Most experts advise setting aside at least 1 percent of your home’s purchase price each year towards home repair and upkeep.

3. You have to pay regular fees.

There are a number of regular fees to owning a home. These may include property taxes, homeowners insurance, utilities and homeowners association fees (which cover shared community amenities, such as a security system, gym, or pool). Your mortgage lender may bundle some of these charges into your monthly mortgage payment to save you from the headache of having to pay a large sum of money at the end of the year, but regardless, it’s important to account for these kinds of fees in your home budget.

Renting a Home

Pros

1. It’s cheaper in the short term.

To rent a house or apartment, most landlords only require a security deposit—on average, the price of one month’s rent—plus at least one month’s rent in advance. Compared with the down payment needed for a mortgage plus the potential for unexpected repairs or changing property taxes, renting can be considerably cheaper than buying property in the short term.

2. You’ve got less responsibility.

A rental property’s landlord is responsible for repairing or replacing anything in the unit. So if an appliance breaks or the toilet backs up in the home you’re renting, you don’t have to worry about fixing it.

3. You’ve got more freedom.

Generally speaking, having a 15- or 30-year mortgage is a significant commitment. Of course you can always sell your home if you’d like to move before the end of your mortgage’s term, but the time and effort involved, not to mention the uncertainty of breaking even on the transaction, means you’re less likely to make a spur of the moment decision about your living situation.

As a renter, on the other hand, you’re only bound by your lease, which may be one year, six months, or even month-to-month. This means you’re not really obligated to stay in one place for any longer than you want to. If you get a new job across town and want to move for the convenience, or you just want to live in another part of the island, renting doesn’t keep you locked into a particular property for a long time.

Cons

1. Your housing situation isn’t permanent.

When you rent a house or apartment, there’s always the possibility that your landlord may ask you to leave, so there’s no guarantee of being able to stay in your home in the long run. You’re also restricted from making permanent changers to the unit itself, such as painting the walls, replacing fixtures, or making renovations.

2. Your monthly rent isn’t fixed.

Most mortgages these days are fixed-rate loans, which means your monthly payment will mostly remain the same for as long as you have the loan. While some states, including New York and Oregon, offer rent-stabilized housing, Hawaii does not; as a renter, your landlord can raise your rent as much as they like, each time you renew your lease.

3. Your landlord decides almost everything.

As a renter, you’re at the mercy of your landlord for nearly all major decisions about your home. Landlords decide the length of your lease, the price of your rent, and whether or not they’ll allow pets. If something breaks in your unit, your landlord will decide how much—or how little—to invest when it comes to making repairs or providing a replacement appliance or fixture. (They may also be in no hurry to make fixes at all.)

Ask Yourself These Questions to Decide if You’re Ready to Buy a House
Should you buy a house or are you better off renting a place? It depends. Buying a home can offer clear benefits compared with renting. The most important one is that buying allows you to control your housing destiny, no matter what happens with the rental home market in the long term. As long as you make your mortgage payments on time, you won’t be forced to leave and your monthly housing costs will mostly be fixed (although you may have to pay more if property taxes get raised).

Also, purchasing a home is a solid way to build wealth. Once you’ve paid your mortgage off, you will own an asset that can be sold or passed on. Even before you pay it off, you can leverage the growing equity in your home to get financing at lower rates than are typically available from credit cards or unsecured credit.

Still, it’s important to figure out whether you’re ready to buy a home of your own. Ask yourself these important questions to get a sense of how close you are to home ownership:

Is my credit good enough?

In general, you’ll need a good credit history and typically a credit score no lower than 620 to qualify for a standard mortgage loan, and some lenders require a score of 700 or more. Additionally, the higher your score, the better interest rate you may receive from your lender.

Do I have enough income to cover my mortgage payment and any other debt?

One of the main things that lenders will be evaluating is your debt-to-income ratio (DTI). The Federal housing guideline calls for a maximum ratio of 43 percent, meaning that your total monthly debt payments—including credit cards, student loans and your potential new mortgage payment—shouldn’t be more than 43 percent of your monthly gross income. Doing a quick inventory of your finances will give you an idea of whether you’re ready to buy a home.

Do I have a steady job or other steady source of income?

Lenders like to see that you’ve got a stable, long-term source of income or continuous employment for at least two years. This employment and/or income history indicates to the lender that you’ll likely be able to make your mortgage payments on time. However, you should also take into account other factors that could potentially affect your income. If your employer is going through things like department downsizes, budget cuts, etc., now or in the foreseeable future, you should consider holding off on purchasing a home until things have stabilized. Otherwise, if you lose your job, you risk defaulting on your loan. If you are self-employed, lenders will require at least a 2-year history and review both your personal and business tax returns to ensure your income is sustainable.

Do I have enough money saved for a down payment?

The traditional rule of thumb is that you’ll need to pay 20 percent of the purchase price of the house up front as a down payment. Do you have that much saved up, or can you get access to that amount of cash, perhaps with help from your family? If not, don’t despair—there are other solutions (Check out our article on down payment options).

Am I ready for the responsibility of home repair and maintenance?

An important part of owning a home is keeping it in good shape with repairs and regular maintenance. This means that, when the refrigerator goes out, you won’t have a landlord to call to get it replaced. But on the other hand, you’ll be able to remodel and upgrade your home to your heart’s content, knowing that your efforts will be enjoyed over the long term. If this sounds great to you, you might be ready for your own home.

Owning a home is a big commitment—but can also be a wonderful experience. If you’d like to learn more, you can talk with one of our lending experts about the price range of home you could afford to buy, which might help you decide.

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