Housing is one of the biggest expenses in the monthly budgets of most American families. With so much of our income devoted to keeping a roof over our heads, you may be wondering if it makes more sense to rent or to buy a home — could you save in the long run if you make the right choice now? While there’s not a one-size-fits-all answer when it comes to the decision to keep renting or finally become a homeowner, considering these factors can help you make the right choice for your family.
Many people think that in order to buy, you need to budget for a down payment of 20%, but there are several federal programs for first-time homebuyers that will let you put down less. With a Federal Housing Administration (FHA) loan, you may qualify to put down as little as 3.5%, depending on your credit. Plus, with an FHA loan, your down payment can be a gift from a family member or a friend.
Active service members or retired veterans can take advantage of 0% down Veterans Administration loans, which come with the added bonus of requiring no private mortgage insurance (PMI). And if you’re a veteran of Native American descent who is looking to buy on recognized federal trust land, you may be eligible for the Native American Direct Loan program.
In Oklahoma, the state Housing Finance Agency offers discounted mortgage rates for qualified teachers, law enforcement officers, and firefighters. And the Freddie Mac HFA Home Possible program gives out $1,500-$2,500 grants to eligible buyers to help cover closing costs. These grants are gifts and do not need to be repaid.
Of course, even if you end up with a no- or low-down payment loan, you’ll still need to factor in closing costs of approximately 2-5% of the purchase price, which include a number of one-time legal and financial fees. But, overall, your up-front costs could be much lower than the 20% down you’ve been picturing.
While buying may require a larger up-front payment than when you sign a typical year-long lease, it can end up costing much less over time — especially if you plan to stay a while. Use an online rent vs. buy calculator to get a more personalized look at the equation. In this scenario, a married couple in Yukon, OK making a combined $100,000 and currently paying $1,000 in rent wants to buy a $200,000 home with 5% down. After 15 years, they will have saved over $37,000 compared to the cost of renting for that period. Think of all the ways you could use that money! Family vacation, school tuition, new furniture, etc.
And if this same couple were to put 20% down, they’d break even after just 5 years.
If you foresee yourself wanting to live somewhere for only a year or two, renting is likely the better option. But if you plan to live in a home for 5-7 years or more, buying may be the better choice for you, as the up-front costs of buying are spread out over time.
What You're Actually Getting for Your Money
When you buy a home, you have the opportunity to build equity over time. Equity is the value of your interest in your home and is calculated by subtracting the amount you still owe from the home’s market value. With each mortgage payment you make, your equity grows.
Your equity also grows as the value of your home increases. Constant increases in home values are never guaranteed, but history shows that the longer you stay in your home, the more likely you are to see its value grow.
Once you start building equity in your home, it is part of your net worth. This means that, if you need to, you can borrow against in the form of a home equity loan. It’s a valuable asset to have — one not available to you if you rent.
Mortgage loan interest may be deductible on your state and federal income taxes, along with property taxes. Tax laws change, so talk to your accountant to see if you qualify for this credit.
Those who buy are locking in a steady mortgage payment and interest rate for the duration of the loan. When you rent, your housing costs are not fixed and are subject not only to inflation but also to unpredictable increases from your landlord. Your landlord could even decide to sell the property or to cease renting and move in themselves.
The decision to keep renting or make the jump to homeownership is a personal one that will depend on your family’s specific circumstances. But the bottom line is, if your finances are stable and you’re looking to commit to a home for the medium to long term, buying will likely end up costing you less in the end. And beyond the dollars and cents, there is also a psychological factor: when you buy, you can settle into your home knowing that your housing costs are fixed and that a landlord can’t suddenly disrupt your lives. Your children will be able to stay in the same school district and you can truly invest in your community. In the end, it’s hard to put a price tag on that sense of stability and security.