Your Financial Future:
Renting Vs. Buying A House
For a PDF version of this Fact Sheet, click here.
Should I Rent or Buy?
Buying a home requires you to be extremely well-prepared. A home is not a small purchase so you should make sure you are financially stable enough to afford one. If you do not have a steady income, keep renting because there’s a good chance that you will not be able to get a loan without a regular paycheck. Furthermore, if you can’t envision yourself in the same place for the next several years, you should rent. For more information on which is the smartest financial choice, visit http://www.myfico.com/.
A Quick Guide to Renting
In case you are not ready to buy a home, here are some tips on renting:
- Know your market, and negotiate realistically. As long as the market in which you are renting is not too competitive, try politely negotiating with the landlord to get a month of free rent or $50-$100 discount off your monthly rent. It is important to know how fast places are rented out in the neighborhood you are looking to rent in, and for how much. This can help you negotiate a better deal and save you money.
- Get everything in writing, and read your lease carefully. Keep an eye out for provisions that seem unfair to you, and discuss these issues with the landlord before you sign anything. Make sure you have all agreements in writing, and include your roommates on your lease so that you all share legal responsibility for the rent, utilities, and any future damages equally. Discuss the conditions of your security deposit with your landlord and make sure you document the condition of the apartment or the house before you move in. Your landlord should perform any repairs either before you move in or within the first month of your move.
- If possible, avoid using a broker. In some cities with difficult real estate markets, you will find that you will need to hire a broker. A broker acts as the middleman (or woman) between you and the property owner. It may be easier to work with a broker if you find yourself in a city where most property owners and management companies only make listings available to brokers and not to the general public. As a result, the broker is the one who handles showing the property, negotiating a lease, and filling out paperwork. You can expect to pay the broker a substantial amount for his or her “help”, but to avoid this you should establish up-front what you are willing to pay for a commission. Usually a reasonable commission rate is 10% of a year’s rent. If you are in a city where you do not need a broker, look for newspaper or online ads with rentals by owners or through leasing offices.
- If you plan to renew your lease, discuss it early with your landlord. It is best to contact him or her approximately two months before the lease is up, to negotiate pricing if you plan to stay. Make sure you communicate well what you want so your landlord does not catch you by surprise with his new terms for the lease.
- Get renters insurance (tenants insurance or an “HO-4 policy”). This type of policy helps protect your personal property in case anything is stolen or destroyed. It also gives you protection against being liable for anything that may happen in your apartment while you are living in it, and may even protect you in some instances when you damage someone else’s property.
- Be Aware of Possible Scams. Websites like Craigslist are popular sites for apartment listings. However, the listings are not verified for authenticity so always be cautious of scams. Warning signs of a rental scam might include a “landlord” who is out of the country, and/or the ad states that they urgently need to rent the apartment so you must “act quick.” Also be wary of anyone asking you to wire them money for rent and security deposit. Many scammers will simply take photographs of apartments from other websites and create fake listings, so always be sure to see the apartments in person and avoid renting them “sight unseen” if possible.
If You Have Decided to Buy a Home
The first thing you should ask yourself is, “What is the price range that I can afford?” This depends on what kind of mortgage (a loan you take out to buy a home) you can obtain, as well as how much you are comfortable paying monthly. Mortgage lenders will look at your credit and employment history to determine how much they are willing to lend. Generally they require a down payment of 10-20%. Your monthly mortgage payment will consist of the principal (the amount you borrow from the lender) and interest (the fee the bank charges to lend you the money). If you own a home, you also have to pay property taxes to the town, city, or county. Most lenders also require you to get homeowners insurance. If you make a down payment of less than 20%, they may also require you to buy private mortgage insurance (PMI), which protects the lender in case you default on your mortgage.
Try to get prequalified and/or pre-approved for a mortgage
To help you figure out how much you can afford to spend on a house, you should get pre-qualified for a loan, which entails being interviewed by a mortgage professional about your income and expenses. Getting prequalified will not guarantee you a home loan, but it will give you a better idea of how big a mortgage you can afford. Additionally, before you pick out your home, you should work with a lender to get a letter of pre-approval. Getting pre-approved means that the lender has verified that you can make the necessary down payment for a house in a certain price range, and that your income is sufficient to make the mortgage payments. Furthermore, the lender can let you know what loan programs you qualify for, how much you can borrow, and at what interest rates.
Research mortgages and shop around
Like any other large purchase, you should take the time to research and shop around for mortgages. Even half a percentage point difference in interest rate can save you thousands of dollars over the life of your loan. Search some of the websites in our resource list below, and see if your bank or credit union can top the best rate you find online.
Decide what kind of mortgage you want to take out
There are two basic types of mortgages:
- Fixed-rate mortgages have a constant interest rate that stays the same over the life of the loan.
- Adjustable-rate mortgages (or variable-rate mortgages) involve an adjustment period every year in which the lender raises or lowers the interest rate depending on what happens to interest rates in the economy. Though this type of mortgage may present a lower interest rate initially, you need to be cautious as it can increase substantially over time.
Try to pay mortgage points up-front
Because your interest rate is the most important factor contributing to your mortgage, it is important to know about mortgage points. These are the up-front fees that you can pay when you buy the home. One point is equal to 1% of the loan. The more points you pay up-front, the lower interest rate you can get.
Know what the APR is
To make it easier for you to shop for a loan, the federal government requires lenders to tell you a mortgage’s annual percentage rate (APR). This is the number you would get if you took most of the charges you pay on the mortgage (including points, interest, fees, and insurance) and expressed them as one annual rate, making comparison shopping much easier.
If you don’t qualify for a mortgage
If you have a poor credit score and are not eligible for a mortgage, it is best to wait a year or two to focus on improving your credit score. Mortgage brokers who promise to get you a loan despite a bad credit history will most likely charge you very high interest rates.
- For more information on mortgages and calculators to help you with financing:
Call the Housing Discrimination Hotline at 800-669-9777 if you believe you have been denied housing on the basis of race, sex, religion, disability, or other distinguishing factors.
For a listing of available apartments in your area, check local newspapers or rental agency websites. There are also websites like http://www.apartments.com/ which includes rental listings for rentals in towns and cities across the country.