Should You Rent or Buy When Mortgage Rates Are High?

Every year, millions of Americans wrestle with the question of whether to buy a home or rent. Unfortunately, the answer is rarely straightforward.

Many factors affect this tough decision. But the choice becomes even more difficult when both rents and home prices are soaring, as they are now in many places. In addition, mortgage rates have been rising, with the average fixed 30-year mortgage increasing by more than 2 percentage points this year to more than 5% in recent months.

Although buying a home can be a great investment, it is not right for everyone, says Brittany Mollica, certified financial planner with Hilltop Wealth Advisors in Chapel Hill, North Carolina.

“I think the main takeaway is that buying a home is by no means a requirement for financial success,” she says. “There are some important things to think about before you do it.”

[Read: Best Mortgage Lenders.]

Buying vs. Renting in Your Area

Local housing costs play a large role in the decision to rent or buy. Contrary to popular wisdom, renting can make more sense for some people.

“Don’t believe that adage that renting is throwing away money,” says Randy Bruns, certified financial planner and principal and founder of Model Wealth in Naperville, Illinois.

Remember that when you rent, your expenses are relatively low and fixed. You owe your monthly rental fee and may have to pay for some utilities. Your landlord also may require you to carry renters insurance, but the cost of coverage is usually modest.

By contrast, homeowners not only have expensive mortgages, but also are responsible for other costs, including:

— Property taxes.

— Homeowners insurance.

— Maintenance expenses, repairs and renovations.

Mortgage insurance or condo or homeowners association fees.

Historically, home prices have closely tracked the rate of inflation, Bruns says. Combine that fact with the expenses of a mortgage, and homeownership is not necessarily the moneymaker people might expect.

“That’s not to say homeownership is not rewarding,” Bruns says. “It’s just not likely financially rewarding.”

Home prices are soaring in many parts of the nation, but so are rents. The median rent cost nationwide surpassed $2,000 monthly in May, according to real estate brokerage Redfin.

In some cases, buying a home could be cheaper than renting. However, renting remains more attractive than buying for some Americans because mortgage payments have surpassed rents on many homes, according to Redfin research.

An online mortgage calculator can help you estimate the costs of owning a home. However, these calculators can be misleading if they only account for principal and interest costs, warns the Consumer Financial Protection Bureau.

The CFPB suggests trying the free “Is It Better to Rent or Buy?” calculator from The New York Times to help you compare options based on your financial situation.

Are You Financially Ready to Buy vs. Rent?

You will need to be realistic about whether you are financially ready to own a home instead of continuing to rent. Overall, homeownership costs often exceed renting and are hard to predict.

Before purchasing a home, build a savings cushion to cover unexpected expenses and emergencies, says Dan Green, CEO of, an Austin, Texas, mortgage lender for first-time homebuyers. He suggests budgeting at least 1% of your home’s value for annual maintenance and repair costs.

“Life throws curveballs,” Green says. “So before you buy a home, have money saved up for emergencies.”

An ample emergency fund is important before plunging into homeownership, agrees Greg Giardino, certified financial planner with J.M. Franklin & Co. in Tarrytown, New York.

“The biggest mistake I see home purchasers make is that they fail to incorporate the ongoing maintenance cost of the home,” he says.

However, do not spend more than 25% to 36% of your gross income on housing costs annually, Giardino says.

“Once you start getting over 36%, it can start to strain your cash flow and hinder your progress on your other savings and retirement goals,” he says.

[Read: Best Adjustable-Rate Mortgage Lenders.]

Should You Rent or Buy?

Either buying or renting can make sense depending on your circumstances.

Owning a home is considered a cornerstone in achieving the American dream. But that doesn’t make it right for everyone. If you plan to buy, make sure you are doing it for the right reasons, Green says.

“Don’t buy a home because you think you’ll get priced out tomorrow,” he says. “Buy a home because you’re ready for a permanent place of shelter.”

What’s most important is wanting to own a home and to be responsible for its upkeep, Mollica says. “I have clients who simply want more flexibility and aren’t sure they’ll ever want to buy a home, and that’s perfectly OK,” she says.

Many people buy a home for the wrong reasons, says Niv Persaud, certified financial planner and managing director at Atlanta’s Transition Planning & Guidance. Make sure you carefully weigh the pros and cons of homeownership before pursuing your dream house.

“One’s decision to rent or buy should be a financial decision,” Persaud says, “but, unfortunately, it becomes emotional.”

You should be able to commit to living in a home for more than a few years, Mollica says. Otherwise, homebuying costs can make for “a less profitable venture,” she says.

Buying a home just to make money from it is also a bad idea, Green says. Instead, try to view equity appreciation as “a long-term bonus,” he says.

[Read: Best Mortgage Refinance Lenders.]

Do You Have a Realistic Budget?

Ask yourself whether your budget can accommodate the costs of homeownership and the other expenses in your life.

You might be used to and enjoy a certain lifestyle that includes a lot of travel, Persaud says. “Some first-time homebuyers become frustrated with the additional maintenance costs and unexpected repairs, which greatly reduce their lifestyle spending,” she says.

If your budget is not robust enough to handle a home purchase, think twice about taking extraordinary measures so you can afford to buy. That includes turning to an adjustable-rate mortgage to make payments more affordable in the short term, Green says.

An ARM can be a mistake if you do not understand the implications of the decision, he says. As interest rates increase, mortgage payments tied to an ARM can swell. An ARM is not a tool to increase home affordability unless you plan to refinance in a few years or are comfortable with the prospect of higher payments when rates increase, Green says.

“Don’t use ARMs because fixed-rate loans are too expensive,” he says.

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