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Buy vs. Rent: How to Decide

As the American economy gets back on more solid ground, the real estate market is expected to continue to improve in 2015, according to a report by the National Association of Realtors® (NAR). The latest NAR National Housing Pulse Survey showed that 80 percent of consumers believe that buying a home is a good financial move. However, before making what will be the biggest purchase many people make in their lifetime, you should decide if buying or renting is the best option for you and your family. Consider the following:

What do you and your family need in a home?
Make a list of the things that are important to you regarding the location, size and features for your residence. Do you want a yard? Do you prefer new construction or an established neighborhood? How close do you need to be to your work, your children's school and family activities?

Don't forget to consider changes that could take place in your situation over the next few years - such as a growing family or potential job change. This is important if you are purchasing a home since it takes time to recoup the closing costs associated with buying and possibly build some equity in your investment. If you are dealing with uncertainties in these areas, it might be best to consider renting until your situation becomes more stable.

What can you realistically afford to spend?
As a recommended baseline, a home buyer should spend no more than 28 percent of his or her monthly income on housing. Before you make a commitment to invest in a home, develop a budget to figure out how much you can spend each month for a mortgage payment without stretching your finances too thin. Make sure your housing costs do not put your ability to pay on-going expenses or save for college and retirement funds, or other life goals at risk. Check out calculators at zillow.com and bankrate.com (under the Mortgage tab) to find out how much you can comfortably afford.

How do home prices compare with the cost to rent in your area?
When comparing the cost of housing, it is important to consider the total cost of buying vs. renting over time. In addition to principal and interest payments, home buyers must factor in the costs of homeowners insurance, property taxes, utilities and any homeowner's association dues or property fees. While you will potentially have the opportunity to benefit from any increase in your home's value when it comes time to sell, be careful not to overextend your finances.

On the other hand, while monthly rental costs may be less expensive than a mortgage initially, remember that rent may increase over time. And while renters can avoid the cost of maintenance and repairs, some rental properties require residents to pay for utilities, parking and amenities. The rent-or-buy calculator at realtor.com (under the Mortgages tab) and the calculator offered by nytimes.com (search: Is it better to rent or buy) can help you calculate the net cost of buying a home versus the cost of renting.

Do you have the time and interest to care for a house?
Consider the time and expense required to maintain a house and any outdoor property. According to NAR, in addition to furnishings and appliances, you need to budget at least one to three percent of the home price each year for repairs. If you have the skills, you can save money by taking care of repairs yourself.

Long-term wealth-building potential
The wealth-building potential of home ownership is based on increasing values and the equity earned when the loan is paid in full. When mortgage rates are low, it could be potentially more expensive to rent than to purchase a residence. The amount of time you plan on owning the home has a major impact on the value of your investment.

Teachable Moments

Including your children and teenagers in the process of deciding whether to rent or buy can have many benefits, such as helping them to understand the costs involved, the importance of saving for something they really want and the need to take care of property to ensure that its value will not decline due to neglect or disrepair.

Here are some ways you can include your kids in this important decision:

  • Whether renting or buying, have your children help with the research to gather input into your desired neighborhoods based on their activities and school needs;
  • If purchasing a house, discuss what chores each family member could do to help with maintenance and upkeep;
  • If renting, talk about some of the limitations the family may have in personalizing the home - including remodeling and painting.