Choosing to rent or buy? Rise in home affordability can make it an easy decision

One bright spot in the coronavirus pandemic is that it has made home-buying an affordable option for many Americans. Specifically, from a personal finance perspective, mortgage rates continue to be low despite a recent upward trend.

That said, the spike in mortgage applications indicates that there is also more competition for potential home buyers, which can drive home prices up in many cases.

Though, many home buyers are also considering an age-old real estate question: Is it cheaper to buy or rent? Read on to learn how you can make this decision based on your own personal finance situation.

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Is buying cheaper than renting?

Buying a home is cheaper than renting in most cases, according to a recent ATTOM Data Solutions report. The property data firm's "2021 Rental Affordability Report" found that you can save money by owning a home in nearly two-thirds of the country. In particular, the report compared the cost of owning a three-bedroom home to the cost of renting a three-bedroom in various housing markets. On a broad scale, owning a home was cheaper than renting.

Brady Miller, the CEO of Trelora, a real estate tech firm, also believes in the benefits of homeownership. "When you buy a home, your monthly payments are going to stay the same even as the property appreciates, which means that the money you invest will be worth a lot more in future dollars," he explains. "When you’re renting, you don’t get the value of appreciation and the costs can increase over time."

However, it's important to note there are cases where homeownership is not cheaper than renting. Specifically, the report found renting was cheaper than buying in most of the country's most densely-populated areas.

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How to decide between renting and buying

The answer to whether it makes more financial sense to buy or rent is largely going to depend on where you want to live and your future plans. However, your personal finance circumstance, like if you have bad credit, may also play a role in your home loan eligibility. Use the two tips below to help you decide on whether home buying is for you.

1. Think about how long you plan to stay

How long you plan to stay in the home will factor into your decision to rent or buy. As Miller puts it, "Every time you buy or sell a home, you’re responsible for paying closing costs, which can eat into your equity."

As a rule of thumb, home buying usually makes sense if you plan to stay in the area for at least five years. A Betterment study found that it takes an average of four years to break even on the upfront costs of closing a home, which means that maintaining a five-year outlook would save money from your home loan.

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2. Look at your personal finance circumstances

In order to make the cost of owning a home more affordable, you’ll likely want your finances to be in the best shape possible when you’re ready to buy. Mortgage lenders look at your credit history and debt ratios to determine your loan eligibility and mortgage rates.

Potential first-time home buyers with lower credit scores may be given higher mortgage rates, which can cost them more money over the life of the loan. In light of that, it’s a good idea to better your financial profile, like improving your credit score, as much as possible before applying for a home loan.

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The bottom line

In the end, the decision of whether to buy or rent a home is a personal one as much as a financial one. It's a good idea to reach out to a financial advisor if you're having trouble making the decision on home affordability on your own. They can look at the specifics of your personal finance situation and help guide you toward which decision is right for you.

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