With the Federal Reserve set to raise interest rates for the fourth time this year, and the stock market moving into “correction” territory, the decision as to whether to rent or buy might seem more complicated than ever. But, as always, the decision has more to do with your personal situation than with the economic forecast.
When The Fed raises interest rates the cost of borrowing goes up. That is true for major banks as well as for individual borrowers looking to get a mortgage. The effect of rising interest rates is complicated. For those with money in savings accounts, a rise in interest rates may be a benefit as the pittance you are now receiving on your savings account is likely to increase. On the other hand, if you have a debt with a variable rate (one that is not “fixed” but can go up or down), the rise in interest rates might hurt as the interest rate on your loan is likely to go up as well. Rising interest rates sometimes spook the stock market, so if your money is invested in stocks, you might be seeing volatility or even losses.
The Federal Reserve policy also has a big impact on employment rates, as a rise in interest rates raises the cost of borrowing making businesses less likely to expand and less likely to need to hire more workers. Maybe the job market will sour and you will not be able to continue to get raises, promotions or better jobs. You may even lose your job. All of these possibilities can make your head swim when it comes to deciding whether renting or buying is your best option. Here’s a game plan to help you make the decision.
Maybe I should rent
Let’s say you are single, or maybe there are two of you, but you are not sure what your next career move will be. You are daydreaming about changing jobs, or returning to school, or moving to a warm climate, these are sure signs that you should choose to rent. Freedom, flexibility and using your available funds to take advantage of new opportunities make renting a better option. Or, you’re not that free, you are encumbered by debt, whether it be a car loan, student loans or, heaven forbid, credit card debt. Right now the important thing is to keep up with or even pay down these high-interest rate loans. Rent for now and reconsider when your debt-to-income level is in better condition. Let’s say you are in between jobs, in a low-paying job or unemployed, you don’t have the economic stability to buy a home or even to afford a down payment so renting is your best or maybe only option.
Now is the time for me to buy
You are settling in with a long-term career plan. You’ve landed a good job with growth potential, and you are likely to stay in one place for at least five years, then buying may be a good option. Experts say that the cost of buying and selling homes in less than five years makes any equity you might accrue in the real estate disappear. But, if you are staying put for at least five years, even if the housing market ebbs and flows, you will likely break even or make money if you buy. Let’s say the likelihood of expansion in your own family is on the horizon, children, dogs, birds are coming your way. Buying might be your best option to lock in a mortgage rate that is likely to rise and give yourself the stability you need to raise a family. Or, even if you are enjoying the single life but you still want to create your own little castle, make a vertical garden in the living room or to paint the kitchen fire-engine red. If you buy a place, your friends and family might believe your decorating ideas are off the wall but they’re your walls and you can do whatever you want.
Finally, if you have money invested in the stock market but you can’t sleep at night due to the current volatility, it might be time to change your asset allocation from equities to real estate, which, although subject to ups and downs, provides you with a roof over your head, making sleeping easier.
Whether to rent or buy a home depends on many factors and there is no right or wrong answer. In making the decision, it might be best to stop trying to forecast the economy and look at your own financial situation and your personal preferences. Start with a list of your individual preferences and resources and go from there.
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