Please make sure you’re sitting down when you read this: A staggering 49.3% of American renters are spending more than 30% of their income on rent, according to the Joint Center for Housing Studies at Harvard University.
What’s the cause of this trend? Part of it may be that the cost of rent is rising faster than incomes.
So how can you combat this? Proper budgeting helps. However, in the right situation, your best bet to avoid the rent problem may be to avoid renting altogether.
Examine the Bottom Line
It’s generally not recommended to spend more than 30% of your income on housing expenses. It puts the rest of your financial life at risk.
With that in mind, it’s best to determine how much you can afford to spend on renting or buying a house and go from there.
There’s no substitute for a line item budget in this area. Look at housing as part of your overall expenses and come to a number you’re comfortable with. Don’t forget to leave a little money aside for savings and investment or emergencies.
If you feel you’re spending too much, it may be time to downsize or look at other options.
Once you have a number in mind, it’s time to figure out whether you should rent or buy.
Rent or Buy
Both renting and buying have some key advantages, so which one is right for you? Let’s take a look at the tale of the tape.
Renting can be good for a few reasons. Let’s run through those.
Renting an apartment may be a logical first step for many young people just getting started. When you’re first starting out on your own, you may only need a small place, and a decent apartment can be just what you need. This also gives you the opportunity to build up credit by making payments on time so you can get financing for a car or house down the line.
Lease agreements also provide a certain amount of flexibility. If you finds yourself moving around a lot, the idea of being able to get out of the lease after a year without having to put the property up for sale may appeal to you.
Finally, certain amenities are included when you have an apartment. Depending on the terms of the lease, utilities, Internet and cable might be included within the rent.
As compelling as the case can be to rent a place, there are an awful lot of good reasons to buy. Every market is different, but chances are it’s more affordable than you think.
The biggest reason to take the leap and purchase your own place from a logical standpoint is that you get something back for your money. When you give your money to the landlord, you get nothing back out of the investments except a place to stay.
By contrast, when you buy, you gain equity with every payment you make. This equity is very much like a traditional investment in that it can be translated into cash.
How does this work?
Once you’ve built up equity for a while, you can refinance to take cash out and use it for other purposes, such as helping to fund a college education or giving your retirement fund a boost to catch up.
You also may build value quicker in the current market as home values have been on the rise for a while now. If your property value goes up, you benefit from the gain, as part of the ratio for calculating equity has to do with property value.
Not only is buying an investment, but it may be more cost-effective than renting. With rates as low as they are, you may be able to own a home by paying as much or less than you’re paying for monthly rent.
There’s also something appealing about having a place that’s yours when you go home. You can really make the space your own. Watch your kids play on the tire swing in your front yard. It gives you a chance to really be involved in the community because you won’t be on to the next place when rent goes up in a year.
While there are certain advantages to a higher down payment, you shouldn’t let the fact that you don’t have 20% to put down keep you from getting a house.
There are a variety of options if you’re looking at putting less down. With a conventional loan, you could put down as little as 3% with standard programs. If you’re going with an FHA loan, the minimum is 3.5%.
If that still seems like a lot to lay out at close, Quicken Loans has an exclusive and exciting new option for well-qualified clients. You can purchase a home with as little as 1% down while gaining 3% equity. This means you can purchase a $150,000 home with a down payment as small as $1,500.
There are a few restrictions: You must have a minimum FICO credit score of 680 and you must be purchasing your primary property.