Renting vs. Buying: How to Know When Renting is the Best Option

Renting VS Buying | Money Savvy Living

If you are getting ready to graduate from high school or college and are thinking about moving out on your own, it can seem a bit overwhelming—and confusing. There is so much to consider: where you want to live, how much of a payment you can afford, will you have roommates, and what does all of the paperwork actually mean…

 

Let’s start at the beginning. The first thing that you need to look at when you are deciding to get your first place, is whether you should rent or buy. Surprisingly, the answer for most young adults, just leaving their parents’ home, is to rent. Why? Isn’t that just throwing money away, when it could be building equity in your own asset? Not necessarily. Here are 3 reasons, that renting may be your best option.

 

SAVE UP FOR A DOWN PAYMENT

In order to get a conventional mortgage, you can only finance 80% of the loan to value of the home you want to buy. If you are above that amount, you have to pay PMI (private mortgage insurance) or find a lender that will do a 2nd mortgage. Taking a few years to stash some cash away for a down payment on your home—and to cover closing costs—will be a huge benefit to your finances down the road.

 

BUILD YOUR CREDIT

If you are just moving out on your own, you may not have much of a credit history built up, even if you do have a credit card or two. Without much of a credit history, which lenders use to determine your ability to repay the mortgage loan, you may be considered a higher risk consumer, and end up with a higher rate. You can take steps, during the few years that you are saving up for a down payment, to build your credit history and increase your credit score.

  • Get a credit card—having a credit card that you use monthly and make a payment on monthly will start building your credit history in a positive way. While racking up a bunch of credit card debt is not good, utilizing a credit card to pay monthly expenses, then turning around and making a payment to the credit card company (on-time) every month, gives you a credit history because your credit card company, most likely, reports to at least one of the three major credit bureaus.
  • Pay your rent on-time every month—even though most rental owners or apartment complexes don’t report to the credit bureau, you actually can build a rental payment history by paying your rent each month by personal check from your bank. This will give you a paper trail of a rental payment history; and often, lenders will accept bank statements to prove this.
  • Finance a larger purchase, such as furniture or a car—even if you have the cash to buy a car or furnish your new apartment, taking out financing on a major purchase like this is a great way to show your ability to repay a loan and can build your credit.

 

DECIDE ON THE PERFECT LOCATION

If you are just graduating and moving out on your own, chances are you haven’t found your dream job. So unless you know for sure that you plan on living in the same area for at least five years, purchasing a home may not make financial sense anyways. When you purchase a home, there are closing costs involved, and typically, it takes at least a couple of years to recoup those transaction costs. The first few years of any mortgage that you take out is also the time during a loan that most of your payment is going toward the interest. So if you move within the first five years of taking out a mortgage loan, you may actually lose money if you sell your home.  In most short-term living situations you are probably better off to just rent, and then buy when you have settled on a location.

 

12 comments

  • My boyfriend and I were just discussing this yesterday! I was curious about buying a starter home and then switching to one that’s more suitable for the future so it’s very interesting that it could put you at risk of losing money. I found your blog through the Afternoon Tea weekly link up and I’m excited to read more!

    • Thanks for stopping by! It is not really something that you may think about, but a mortgage is so big and the closing costs are pretty substantial, so you definitely want to plan on living there for more than a few years when you purchase a home, unless you plan on keeping it as a rental property for the future…

  • Such good advice! My hubby and I were lucky enough to read this great book called Smart Couples Finish Rich and its all about organizing finances. Nothing about it is easy but making a plan is the best idea!

  • Sending this along to my brother and SIL, as they just bought a new house and plan to rent the one they just moved out of. These are some great points to keep in mind and remember. I’m sure it will be very useful to them! Thanks for sharing 🙂
    Mel (Melly Moments)

  • Good tips. It is much harder for young ones to buy a home these days. Thanks for sharing with us at #AnythingGoes Link UP
    sue

  • My husband and I are actually going through this right now. Our main issue is that with the breeds of dogs that we have, most rental places that have a backyard with the type of fence we need won’t accept us point blank. Because of that, we are pretty much stuck having to buy. Thankfully, he’s in the military so we can take out a VA loan which doesn’t require any down payment whatsoever, and the area we’re in (read, a military town) will always have an influx of people we can rent out our house to. We plan to not have any breed restrictions and most likely not require pet fees because that’s another part of renting that makes it too costly for us to change locations. Between first, last, security, deposits, and pet fees, we’re looking at thousands of dollars. Without the ability to get VA loans, though, we would have been screwed. Renting is a great option starting out so long as it’s actually plausible for your situation.
    Elizabeth

    • You are absolutely correct, pets can definitely be a game changer when it comes to renting. Good point!

  • Pingback: Share the Wealth Sunday Link Up {#4} - Money Savvy Living

  • These are great tips! As an Apartment Manager for years I would tell someone renting their first apartment if they are planning to rent a place with anyone other than a spouse, to make sure everyone living in that apartment/house has their names on the lease and signs the rental agreement. This will protect you and your credit in the long run .
    Kim @ This Ole Mom

  • Great information for someone just starting out. I agree renting is the best route, until you’re sure where you want to settle down.

  • This is a great read to those just starting out! Thanks!

  • This is great advice. I wanted to “own” for so long, but it was only until it made sense, which it does now. I miss calling a landlord for problems. I have to be the landlord and tenant and do everything. Sometimes it sucks.
    April G

Leave a Reply

Your email address will not be published. Required fields are marked *