Rent or Buy? A Guide to 2017
Home ownership, for most people, is the largest asset in their portfolio. Purchasing a home can be an important part of your financial plan. That said, following the economic crisis of the late 2000s, home ownership trends have taken a real dive. According to this New York Times article, (and their source: Harvard University’s Joint Center for Housing Studies) the number of new rental households in the U.S. has increased by 770,000 annually since 2004.
Many Americans find comfort in the idea of not owning a home when the Great Recession is still a fresh memory. That said, home ownership remains a keystone in a healthy financial strategy and something that should not be dismissed based on the financial climate fears alone.
Here’s what I tell my clients who are grappling with the big rent/own decision. If you are in the throes of a big life transition, it may be wise to rent. Job transfers, going through a divorce, or retiring to a new state, are all excellent reasons why renting might be the best choice for you, at least in the short term. After all, you want to be flexible in the face of the unknown in your personal life. Every situation has its nuances, to be sure. The benchmark that I use is: if you are planning to live in an area for fewer than 3 or 4 years, it may be wise to rent. Similarly, in the fashion world, if you are in need of a special occasion dress – but know you will never wear it again – you may want to rent a dress from Rent the Runway. That way you are not committed to owning an expensive dress in your closet that you may not wear again!
However, if you’re going to be staying in one place for more than 4-5 years, owning really can be a viable investment. And then a new question arises. Since most of us want to have our homes paid off by the time we retire, a 15-year mortgage can often seem savvy, albeit strenuous. I often get the question: Do I buckle down and do a 15-year mortgage? The question is a big one because a 15-year mortgage will come with a considerable monthly payment and can hamper your cash flow – especially if you have kids in college or other large, unavoidable financial responsibilities. I recommend that my clients take into consideration the current state of mortgage rates – which continue to remain at all-time lows. I like to suggest they consider a 30- year fixed mortgage. Then, calculate how much more monthly cash you would require to meet a 15-year mortgage. Don’t forget, even with a 30-year mortgage, you can still pay the 15-year payment. You just won’t be locked in. If you run into unforeseen expenses, you have the flexibility to go back to the lower minimum payment. This way you’re in control of your mortgage as opposed to the bank being in control. Nice!
After all, having choices is the greatest luxury!
LPL Financial and Stonebridge Wealth Advisors LLC do not offer mortgage services