Home ownership has always fallen into the American Dream equation, but the process is not always the easiest, leaving many wondering whether to buy or rent longer.
So, how do you know when the time is right to choose either option?
“The goal is to buy,” said Alison Taylor, chairperson of the real estate program at College of the Canyons. “But it’s easier said than done. It becomes a question of finding the right information.”
Tools from Zillow or Realtor.com can offer an on-the-spot glance at one’s rent-versus-buy situation. After answering a couple of questions, such as what a comfortable home price looks like, the Zillow calculator can determine the break-even horizon, or how many years it would take for the cost of renting to match the cost of buying.
In the Santa Clarita Valley, for example, it would take three years to hit the break-even point for buying to pay off over renting for a $540,000 home instead of paying $2,600 month in rent.
This means that after those three years, the home would have more than $215,000 in equity (what’s available to the seller) if you decide to buy. But if you choose to rent, invest a down payment and other savings, earnings would reach about $20,000 at a 6-percent return rate.
The bottom line, according to the estimation, is that buying would benefit over renting if you plan to live in the home for more than two years and nine months.
These calculations, however, are based on a down payment of 20 percent, or nearly $110,000.
Not everyone can offer a down payment of that amount and calculators can only provide so much guidance, said Jeff Eisenberg, broker and owner of Southern Oaks Mortgage Inc. in Valencia.
That’s where he recommends to “speak to a trusted real estate agent and broker because other factors can come into play” to help decide whether you can rent or buy.
A deeper look into your case
Those factors include one’s credit score and debt-to-income ratio, where monthly expenses are divided by gross monthly income.
“It’s very important to know your income and debt ratio, so that you know how much you can and can’t afford to take in loans,” said Steve White, president of the California Association of Realtors. “What you don’t want is for your monthly debt to exceed the percentage of your monthly income.”
Talking to an agent or lender, who can help with ratio calculations, can also mean receiving advice on how much you should consider saving while renting if buying is not the best option, vital for first-time buyers.
“Even if you don’t qualify, a good lender or real estate agent could help you through the process that will get you to qualification,” said Taylor.
As a broker herself, she has advised clients to avoid job gaps and save money for a year. For example, she said, if you pay $1,500 a month to rent, it would be about $1,900 a month to buy.
“So, save that extra $400 a month to build on a down payment. Doing so gives you the feeling of paying monthly for a buy. This can be done so with the help of an agent early on, so you don’t make a rash decision,” said Taylor.
To break it down considering today’s market, experts recommend buying today as prices will be higher 10 years from now.
“If you can afford a $2,000 or $3,000 monthly rent, you should qualify for a house or condo,” said Eisenberg. “But if you can’t, sometimes it’s better to stay renting for six months to a year.”