If you are looking for a place to live right now… Congratulations! You are navigating one of the most complex and expensive housing markets in recent history. The pandemic and inflation-heavy economy have pushed both home and rental prices to new all-time highs. The median PA home price in September of 2022 was $206,000 which is 30% higher than the median PA home price of $158,000 three years ago in September 2019, according to the Pennsylvania Association of Realtors. The average rent in Lancaster for a two-bedroom apartment during this same three-year span has increased 22% from $1,225 to $1,500 per month. Not to mention, mortgage rates have also increased substantially over the past year, with the average 30-year fixed mortgage rate being just over 7%.
For most Americans, buying a home is the largest purchase they will ever make, so this inflated environment can be quite terrifying. There are pros and cons to both buying and renting in today’s market, and making that choice ultimately comes down to a case-by-case basis. Everybody’s situation is different, so you should ask the following three questions to provide clarity in your decision to buy or rent.
How long do I plan to live in the area?
Purchasing a home is not the best option for everyone, especially if the plan is to live somewhere for only a year or two. If you are living in an area but do not plan to settle down, maybe due to family, work/travel, or a change of scenery, then renting may be the superior option. Buying and selling a house is also accompanied by lofty expenses (closing costs, inspections, appraisals, and realtor’s commissions), which make moving very expensive. The costs associated with frequent moves add up quickly and are something you want to minimize if possible. If you plan to be around for the long haul in an area and can afford it, then buying is often the most cost-effective choice. Purchasing a home will help you begin building equity and allow you to stop making those rent payments that often just pay off someone else’s mortgage.
Am I financially prepared?
It’s important to determine if you are financially fit and ready to become a homeowner. Do you have enough saved for a down payment? Can you afford a mortgage? What is your credit score? Are you sacrificing retirement or other goals to buy a home? A good test to see if you are financially prepared is to have the following prerequisites: an emergency fund composed of at least 3-6 months of living expenses, $10,000 in cash for closing costs and moving expenses, 10-20% of the home value saved for the down payment, and a credit score of 700 or higher, which helps you qualify for a lower interest rate. While these may just be rules of thumb, this assessment of your financial status provides a good starting point when making the integral decision to buy or rent.
What will be my monthly costs and do they fit into my budget?
Adding a mortgage payment to your monthly costs should not add significant stress to your life. When you are considering the purchase of a home, it is vital to determine if expenses related to home ownership work in your budget. We recommend allocating no more than 25-30% of your monthly gross income toward your mortgage payment (including escrow costs, homeowner’s insurance, and property taxes) and any other housing expenses such as utilities. It is important to remember that maintenance and upkeep costs are not cheap either. When you own a home and something breaks or goes wrong, you are responsible for the repairs (not your landlord). As a renter, you don’t have to worry about the costs associated with a leaking roof, broken stove, or bursting pipe. For these reasons, it is crucial to make sure you are in a financial spot to deal with these unexpected events when (not if) they occur.
Deciding whether or not to buy a house is not an easy choice. As the housing market begins to slow, it’s important to partner with a financial professional who can help you navigate your options. Here at Stewardship Advisors, we always have your best interest in mind, and we will analyze your individual situation. By answering each of these three key questions, you can approach your next moving decision with assurance and confidence!
Like this article? Want to learn more about how to manage your personal finances?
Check out our Personal Finance Archives where we’ve compiled helpful tips and tricks to help you plan your financial future.