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Rent or Buy?

The rise of the sharing economy which offers easy, short-term access to everything from car rides (Uber, Lyft) to high-fashion (Rent the Runway), has some people thinking that Millennials aren’t so into buying high-ticket items – including that highest of high-ticket items: a home. But those people are, well, wrong!

Our pals at Nerd Wallet debunked that myth recently, showing that while younger folks may think home ownership is out of reach for them, most are as interested in that American Dream as the generations before them. Here are a few things to think about when you’re trying to decide if it’s time to ditch Team Renter and join Team Homeowner.

Job 1: Get Preapproved

You may think you know how much money you can afford to spend on a home, but unless you’re paying cash for it, you’ve got to know what a mortgage lender thinks you can afford. In America’s highest-cost cities, people are known to pay more than 50% of their income on housing. However, there’s probably not a lender on the planet that would approve a mortgage under those circumstances!

A better approach is to plan on spending no more than 30-35% of your pre-tax income on housing (including mortgage, property taxes, and insurance). If you want to be conservative, shoot for no more than 25% of your after-tax income. But no matter what, step one is to get preapproved for a mortgage so you know for sure where you stand, with the income you have. (Even if you’re not quite ready to get preapproved, you can check out this nifty calculator to help you zero-in on how much house you can afford.)

Do a Real Cost Comparison

With your preapproval in hand, you’ll know how much money you can afford to spend on a home, but remember that you can’t just weigh monthly rent versus monthly mortgage. Both alternatives can contain a boatload of hidden costs. For example, some rentals include things like basic utilities, cable/satellite, and pest control that you’ll have to cover with your own home. On the other hand, with your own home you’re unlikely to have to shell-out extra cash for things like pet deposits, parking, and storage, which is common with rentals.

Be sure you do thorough research, so you don’t skew the equation in one direction or the other.

How Long Will You Stay Put?

A home isn’t what we’d call a liquid asset – you may not be able to readily sell it at a good price, at any given time – so before taking on a mortgage, you want to be sure that you’re planning to stay put for some period of time. Also, as with renting, there are some upfront costs to taking out a mortgage. For example, mortgage closing costs can range from 2-4% of the purchase price, and include things like title insurance, appraisals, and home inspections. A good rule of thumb is that you should plan to stay in the home for at least five years to make it worth your while to buy or refinance a home, and reduce the odds of having to sell for less than you have invested in the home.

Want to know more about renting vs. buying? Check out my podcasts!

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