Things are looking up in the housing market. After a six year slump, Realtor.com reported a 5.27 percent increase in median housing prices in 2013. The rental market saw improvements as well, with median prices ranging from $1,100 to $2,650 depending on location. While these developments spell good news for the economy, what does it mean for you? Should you take advantage of the lower home prices before they increase, or should you rent a home with affordable pricing? There are pros and cons to both, especially when credit repair is a concern. Read on to learn about the particulars. They will help you gain the perspective you need to choose to the right path.
- Fluidity. Freedom is the keyword when it comes to renting. A short-term lease provides you with the option of moving when necessary. If your income is variable and your goal is a low cost of living, renting is sometimes the best avenue.
- No extras. You’ll never need to worry about extra expenses associated with keeping up your home. Things like property taxes, insurance, and maintenance are billed to the land owner, allowing you to keep your costs low.
- Qualifications. If you’re focused on credit repair, you’re probably dealing with a less-than-perfect credit score. The good news for renters: Qualifying for an apartment is usually easier than qualifying for a mortgage. Most landlords have their own set of credit criteria and only ask for a security deposit in the form of one month’s rent.
- Credit help. Installment debt is a big credit repair booster. Adding an apartment rental to your credit report means adding new, positive account information. (Note: To ensure the best outcome, be sure to pay your rent on time and ask your landlord to report your good deeds to the major credit bureaus.)
- Uncertainty. Freedom can be a good thing, but renters looking to settle down may find the task of moving a little unnerving. Depending on your state’s laws, landlords have the right to raise your rent each year, putting further strain on your budget and possibly forcing you to relocate. It’s important to consider the costs associated with moving as well, e.g., painting, paying a new security deposit, renting a moving truck or hiring movers, etc.
- Lost opportunity. Renting offers little opportunity for investment. While buying a home allows you to retain your cash in the form of equity, the same isn’t true for renting.
- Consistency. If you like consistency, buying a home could provide the stability you crave. A fixed-rate mortgage allows you to budget the same amount for living expenses each month. While it’s true that you may pay more for homeowner’s insurance and upkeep, you’ll never have to worry about a raise in the rent.
- Tax breaks. Paying property taxes may seem like a drawback, but the accruing interest on your mortgage is also tax-deductible, providing an advantage over renting during tax season.
- Opportunity for growth. A common complaint with renting is “throwing money away” each month—or paying for housing without gaining anything. Buying a home allows you to invest your money in the form of equity, allowing you to save and, depending on conditions, earn a profit if you ever decide to sell.
- Credit help. When used correctly, a mortgage is credit score gold. Adding a 30-year fixed loan to your credit report recommends you to other lenders. It also has the power to increase your credit score as time passes. Pay your mortgage faithfully and you’ll be one step closer to long-term credit repair.
- Increased responsibility. Owning has its perks, but it also comes with greater responsibility. You’ll have to worry about home repairs, lawn care, insurance, and more. Before buying, it’s important to ask yourself whether you can comfortably afford these extras as they arise.
- Strict qualifications. Gone are the days of easy mortgage requirements. The average bank now requires a minimum of 10 percent down-payment and a credit score of 720 to qualify for competitive lending terms. Unless you have a boisterous savings account and a high credit score, buying may not be your best option.
- Greater consequences. Failing to pay your rent can result in late fees, credit damage, and eventual eviction. Failing to pay your mortgage can result in foreclosure and up to seven years of even greater credit damage, preventing you from buying again or even renting without a cosigner. A good rule of thumb: never spend more than three times your income on a home (e.g., If you earn $50,000 per year, never spend more than $150,000 on property). If you want to avoid credit damage, affordability is imperative.
The Bottom Line
Choosing to rent or buy is never an easy decision, but it should always be an informed one. Ask yourself a few questions along the way:
- Which is more affordable, renting or buying?
- Can I afford to place a down-payment on a home?
- How often do I move? How much do I stand to gain or lose my moving again vs. settling down?
- What are the projected rental and home prices in my neighborhood?
- If I should never spend more than 30 percent of my gross income on housing, how much can I afford?
- How will my decision impact my credit repair goals?
Plotting your course is just as vital as the course itself. Protect your credit by treading carefully on the path to good housing.