Weighing options: How to decide whether to rent or buy

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House for sale
As the housing market continues to recover, interest rates are projected to remain at their current historic lows at least until the end of 2014. Those low rates and the wide availability of vacant homes definitely favor buyers. But homeownership isn’t right for everyone. In fact, some former homeowners whose properties were foreclosed have vowed to never buy a home again.

If you’re trying to determine whether renting or buying is best for you, consider the following questions:

Where do you want to be?

Thinking about packing up your things and trying life in a different locale? Don’t even think about buying a house. The high cost of buying a home mean that if you sell your home within the first couple of years, you’re likely to end up losing money. It could take several years in your home before the purchase pays off, and some first-time homebuyer programs require that you stay in a home for a set period of time in order to receive certain benefits.

If you’re going to buy a home, you need to be reasonably confident that you are going to stay in one place for at least two years – the longer, the better. It’s impossible to know what the future holds, but if there’s a chance you will move in the near future, it might be wise to wait and see how things play out.

Can you cover the costs?

While most renters pay a deposit on their residence – and in some cases also pay first and last month’s

rent up-front – buying a home requires a considerable up-front investment. You should be prepared to make a down payment, the amount of which can vary considerably depending on the home’s value, the market in which you’re buying and many other factors. Use a mortgage payment calculator to find out how the amount of your down payment will affect your monthly mortgage payments. Anticipate spending a few thousand dollars on the down payment, and be pleasantly surprised if it’s less.

You’ll also need to cover miscellaneous fees for title searches and closing costs, and while these costs – along with your Realtor’s cut – may be included in your overall mortgage, you’re still paying for them, even if that money doesn’t come directly out of your bank account

Homebuyers need to have extra funds on-hand — generally at least $1,000 – to cover inevitable repairs and maintenance that the home will need upon purchase.

Do you have a good credit score?

If you have already gone through the pre-approval process with a mortgage company, you’re probably aware of your credit standing. A low credit score can limit the home value you are approved for, disqualify you for some federal loan programs and lead to higher interest rate on your loan. Even a marginal difference in your interest rate can cost thousands of dollars over the life of the mortgage. In such circumstances, you may be better off by waiting to buy a home until you can rebuild your creditworthiness.

As a general rule, if you’re not sure you can afford a home, don’t rush into it. Home prices won’t be skyrocketing anytime soon, so a cautious approach is best.