When to Buy versus When to Rent

Here's a piece from Money that says higher interest rates are making it harder (more expensive) for first-time homeowners to buy a house. That's not really new news -- anyone following interest rates the past several months could tell you that -- but what I did find useful was their suggestions on when you should buy and when you should rent. Their guidelines:

• If [the] total cost of owning each month exceeds by 25% or more the cost of renting, you may be better off renting.

• Spend no more than 30% of gross income on housing.

In my experience, these are generally good guidelines, though I always err on the side of "the lower the better" when it comes to borrowing and expenses. While I do agree that it's almost always better to own a house in the long run, that may still mean renting in the short term (to save up for a downpayment, find the right house that you both like and can afford, etc.).

However, based on my scientific estimates (a.k.a. numbers I made up) only about 1.3% of the U.S. population has enough financial discipline to heed this advice. Instead, they turn to the old tried-and-true method used by people who want to buy something they really can't afford: they rack up tons of debt.

Here's what Money says is happening:

In Phoenix, Furois said, the difference between first-time buyers last year and now is greater willingness to go for an interest-only loan if that's the only way they can afford the purchase. The hope being that they will build equity over the next five years via price appreciation, rather than through their monthly payments.

New York-based certified financial planner Stacy Francis of Francis Financial isn't a fan of 100 percent financing or interest-only loans since the point of buying a home is to build equity sooner rather than later.

While these loan structures may pay off in a booming housing market, buyers run the risk of owing the bank should they have to sell when prices are down. At the very least, if prices flatten, they'll have to pay for the selling costs, such as a realtor fee.

If you haven't heard me say it before, I hate interest-only loans and all the other bad (for your finances) loans out there. Instead, I prefer a solid, reasonable plan to selecting and buying a house.

Comments

[John]

I have been looking for a place near the University of Arizona with my brother, and to own one down there is looking at $300,000 for a small 3 person house. To rent is much cheaper but its so hard to find a good place, I wish the school would go into off campus housing help for students.