4 Questions from Our Michigan Bank to Guide Your Decision
A full recovery from the economic downturn after COVID-19 will take time. The pandemic affected every area of life from how we interact to how we achieve life goals like attending college, getting married, and buying a house.
When you and your family need more amenities than apartments offer and are ready to explore options, you may be wondering whether to rent or buy a house. Our Michigan Bank recommends answering these 4 questions to help with your decision.
- How much can you afford to spend on housing?
The adage “don’t spend money you don’t have” is vital when you’re evaluating housing. Accepting a bigger monthly mortgage or rental payment because you anticipate a pay raise can lead to more debt than you can handle if plans don’t work out.
Banks in Michigan advise using 25 percent of your monthly take-home pay as a guideline for calculating how much you can spend on housing – either rent or mortgage payments. Following that rule of thumb gives you room in your budget to save for your children's education and your retirement.
Keep in mind that the total cost of housing when you purchase a home includes how much money you have to put aside monthly, for items such as property taxes, insurance, maintenance, and homeowner’s association fees (if applicable).
If you’re unable to put down a 10 to 20 percent deposit when you purchase, you’ll also need to include mortgage insurance in your total cost.
- How long do you plan to live in your new home?
If you think you’ll only stay in the area for 3 to 5 years, you may want to use caution when deciding to purchase a house as you cannot predict the future market when it comes time to sell.
When you plan to keep your home 5 years or more, look for a neighborhood that meets your needs for proximity to your job, excellent schools, or other criteria. Banks in Michigan suggest partnering with a realtor to find a house that has the opportunity to build value. Your dream home with granite countertops, spa-like bathrooms and new landscaping may be outside your price range. Improving the house over time will help you keep monthly payments more reasonable, today.
- What kind of financing terms do you need that will work for you now?
Whether you’re talking with banks in Ann Arbor, Grand Rapids, or Detroit, most lenders will suggest that you don't purchase a home if you have high amounts of credit card or student loan debt. They’ll also recommend that you save 3 to 6 months of living expenses to pay rent or mortgage and your bills, if your job is terminated.
For home buyers, a 15-year mortgage may be appealing as a way to reduce the total long-term cost of financing. A 30-year repayment schedule may align better with your current financial condition. As your situation changes, you and your Michigan bank team can explore refinancing.
- What will happen to your overall wealth if you rent vs. buy a home?
If you know how long you plan to stay in your new house, then consider the following comparison for insight into which option would generate better return for you.
Suppose your total cost of ownership to buy a house is $1,700 per month, but you could rent a similar home for $1,200 a month. Calculate how much you could earn by investing the $500 you save as a tenant and compare it to the equity you anticipate to build over time if you purchased the house.
Level One Bank Can Help Provide More Insights about Renting vs. Buying a Home
We’re living in challenging times that may make buying a home seem like a risky decision. If you find a house that meets your needs, you have job stability, and you can get financing, buying a home might be the right course of action.
Contact our team for more information about your current situation and finding a home mortgage that fits your budget.
“Buy a house when you are in a stable professional and social situation, not before. It’s not the American Dream; it's not a no-brainer. It's not enough to just compare the mortgage payment to the rent payment, and renting is not throwing away money." -- Jim Dahle, M.D.