Buying a Home 101: The Value of Buying vs. Renting

Buying a Home 101: The Value of Buying vs. Renting

By Maria Natarelli, CFP®, BFA™, CRPC™, CDFA®

Private Wealth Advisor & Managing Partner of Inspire Confidence Group

For many people, buying a home is one of the most significant financial decisions they’ll ever make. While renting can provide flexibility and fewer maintenance responsibilities, homeownership offers long-term financial benefits, including equity building, potential appreciation, and tax advantages. Instead of paying rent to a landlord with no return on investment, a mortgage payment goes toward owning an asset that can increase in value over time. However, purchasing a home requires careful financial planning to ensure it aligns with your budget and long-term goals. Before making this commitment, consider these key financial factors to determine if homeownership is the right move for you.

1. Assess Your Financial Readiness Before purchasing a home, it's crucial to evaluate your overall financial health. This includes checking your credit score, saving for a down payment, and ensuring you have enough cash reserves for closing costs and unexpected expenses. A strong credit score can help secure better mortgage rates, which can save you thousands overtime. Most lenders recommend a down payment of at least 20% to avoid private mortgage insurance (PMI), but there are options for lower down payments depending on loan type.

2. Determine How Much House You Can Afford Lenders typically use the 28/36 rule, meaning your monthly mortgage payment should not exceed 28% of your gross income, and total debt payments (including mortgage, credit cards, and other loans) should stay under 36%. However, just because a bank pre-approves you for a certain amount doesn’t mean you should borrow the maximum. Consider your lifestyle, future financial goals, and unexpected expenses when deciding on a comfortable price range.

3. Factor in All the Costs of Homeownership Many first-time buyers focus on the mortgage payment but overlook additional costs. Property taxes, homeowners insurance, maintenance, HOA fees (if applicable), and potential repairs can add significantly to the cost of homeownership. A good rule of thumb is to budget at least 1% of the home's value per year for maintenance and repairs. Having an emergency fund specifically for home-related expenses can prevent financial stress.

4. Consider the Long-Term Investment Potential While buying a home is a personal decision, it’s also a financial investment. Research the local housing market, neighborhood trends, and future development plans to gauge long-term value. Location is a major factor in a home's appreciation potential. Additionally, think about how long you plan to stay in the home—if it’s less than five years, renting might be a better financial choice due to closing costs and market fluctuations.

5. Get Pre-Approved and Shop for the Best Mortgage Before house hunting, getting pre-approved for a mortgage gives you a clear budget and makes you a stronger buyer in a competitive market. Compare mortgage lenders to find the best interest rates and loan terms. Consider different mortgage types (fixed-rate vs. adjustable-rate) based on your financial situation and risk tolerance.

Working with a financial advisor can help determine the best financing strategy for your long-term goals. At Inspire Confidence Group, we evaluate these financial factors with you so you can make a confident and informed decision about homeownership.