The rent vs buy decision for a home is ultimately your own, however, if you feel like the time is right, you should take a step back and really examine whether home ownership is something that is right for you.

When you do decide that it may be the right time to buy a house, this article should help you make a more informed decision.

Rate of return

It’s a common belief that real estate is one of the greatest investments you can make, however, over time, real estate under-performs the S&P 500 in the Rate of Return category. On the other hand, you’re going to pay for a place to live one way or another, so if you can buy a house for near the cost to rent, you can come out ahead.

The economy

Wouldn’t it be great if the mortgage payment on a home was the same as the cost to rent a similar property in the same area? Of course it would, if that were always the case, we’d all be homeowners, but it’s not. Property values swing just like the prices on any other market, much more so in recent years. The idea is if your mortgage payment on a house is going to be significantly more than it would cost to rent that same house, it’s probably not the right time to buy.

Also pay attention to what’s happening in the housing market in your area. Have prices been shooting sky high for several years? If so, they’re unlikely to continue on that path for much longer. On the other hand, if prices have been dropping like crazy for a while, it may be the right time to buy.

Costs you may have overlooked

When considering the affordability of a property, keep in mind the fact that the mortgage isn’t all you have to pay each month. In addition to that, you’ll pay homeowner’s insurance, property taxes, and depending on where you live, flood or hurricane insurance. Insurance costs vary depending on where you live, areas prone to natural disasters like coastal Florida are going to have significantly higher costs associated with homeowner’s insurance.

Property taxes are also often overlooked, and in some areas, that’s a big mistake. Because of high property values in California, you might pay $600 per month or more in state property tax alone. That’s a blunder you don’t want to make.

As if that wasn’t enough already, right? Well, you also have the maintenance and utility costs of owning a home. Maintenance is something you’ve probably never paid if you’ve always been a renter, but you can expect to spend 1% of the total purchase price of your home on maintenance each year, that could be $2,000-$3,000.

I’m sure you paid utilities as a renter, but keep in mind that a bigger palace means a bigger utility bill.

Down Payment and Fees

While this is just another cost, its a big one so we feel it deserves its own section. Conventional wisdom says you need a 20% down payment, but if you have great credit you can have as little as 0-5% down payment, depending on the purchase price. Even so, if you’re looking at a $300,000 property, a 5% down payment is $15,000…that’s a hefty chunk of change.

That’s not all, you’ll also pay around anywhere from 1-3% on the mortgage amount in closing costs that are in addition to the down payment. That’s another $3,000 – $9,000 on a $300,000 property.

Can you get approved?

One more question you need to ask yourself is can you even get approved for a mortgage? That’s a tough question to answer in an easy way, but take a look at your credit score, if it’s in the low 600′s or even lower, you may find it tough to qualify for a mortgage.

If you’re unsure, contact a bank or broker and see what they have to say.

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