The Bay Area housing market is one of the most expensive in the nation, and if you are in the middle of looking for a place to live, one of the most frustrating. You have two choices: rent or buy. Either you can commit yourself to 30 years in a house that could lose value, and will certainly need maintenance, or you can rent and let your landlord build equity. Both options have their ups and downs, so is renting or owning right for you?
Are You Financially Prepared to Buy?
The first thing you want to ask yourself is whether you actually do have the option. Can you afford 20 percent downpayment in a market where houses can easily top $1 million? Another option is an FHA loan, where you only have to come up with 3.5 percent, but know that you’ll have to pay mortgage insurance, which adds between .5 percent to 1.75 percent to the cost of the loan.
Ironically, if your credit is iffy, you might have better luck buying than renting. An FHA loan requires a credit score of 580 and above. If you can shell out a 10 percent downpayment, you could qualify with a score that’s even lower.
Naturally, things aren’t as clear cut when you rent. In a competitive rental market, landlords can afford to be picky. You might qualify for a rental with a less than stellar credit score, or the landlord could rule you out based on just a few late payments. If you aren’t sure whether you’re financially prepared to buy, Trulia has a handy calculator.
Is it the Right Time to Buy?
Credit score and downpayment shouldn’t be the only factors in your decision. Real estate markets, like all markets, go in cycles. Over the last few years, real estate has boomed, but there’s a chance we could be in for a bust soon. If you’re planning on staying in the house for a while, and you’re job is secure, buying still might be worth it. Historically, real estate prices always recover, making it a good long-term investment. If, however, you plan on staying less than three years, you could take a big loss if the market goes south. Three years is about the amount of time it takes to begin building equity, at least in a stable real estate market.
Of course, there’s more to the decision about whether to rent or buy than financial. If you want your home to be yours; you want to paint and renovate at will, you should buy. If you value freedom over a solid home base, then rent.