Buy a home or rent a home? Four things to consider.

Here are four key points to ponder before deciding whether to buy a home or rent a home.

Damian Dovarganes/AP/File
Fred Archambault and his wife, Amy, couldn't afford to buy in the West Hollywood, Calif., neighborhood where they rented for 10 years, so they moved 30 miles north to Santa Clarita and bought this home. Here are four things to weigh before you decide whether to buy a home or rent a home.

It is often a tough decision of renting or buying a house. How do you know which is best for you? There are quite a few forces involved in making the decision. Certainly there are many pros and cons of buying versus renting.

Everything aside, there are four important things you should keep at the top of your list when trying to decide.

Monthly payment affordability

There is nothing worse than having a monthly mortgage payment (including insurance and taxes) put a squeeze on other areas of spending in your monthly budget. Such a squeeze can leave you wondering why you made the home purchase decision when you’re frustrated you don’t have enough money to go out and have some fun or meet other expenses. You have to keep housing costs within control.

Practically speaking, Crown Financial Ministries recommends that your home associated costs be no more than 33% of NSI (Net spendable Income) for a family of four. Net Spendable Income is money left over after taxes and tithing. As a safeguard against stretching your house payment too far, Crown includes home associated costs within the 33%. Such costs include electric, water, maintenance, etc. If you can stay within the 33% you’re in good shape to have adequate funds for other areas of the budget. You visit Crown’s website to view find a spending guide that fits your situation.

Down payment amount

Often mentioned and critical is the amount of money you have on-hand for a down payment. Make sure you aren’t including various costs associated with the loan itself and prepaid expenses. Rather, it is the amount that you expect to use to put down against the sales price of the home.

Ideally, that amount should be 20% or more. It’s a good amount in that it allows you to avoid Private Mortgage Insurance (PMI). It also creates good amount of equity to protect you should the price of your house go down in value. You don’t want to owe more than your house is worth.

If you don’t have 20% to put down, consider how long it would take you to save this amount before buying. Note: your down payment shouldn’t pull from emergency cash savings. This is considered to be other critical savings that should remain in place after you’ve purchased your home. Create a savings plan and try to hit the 20% within 1-2 years if possible.

Make progress on your financial journey

Don’t forget where you are and where you’re going. If you’re using the Money Map or the Baby Steps to guide your journey, you’ll want to make sure home ownership doesn’t render you stagnant. For example, let’s say your financial journey includes tithing 10% each month, saving $1000 for emergencies and eventually getting out of debt.

You have to ask yourself if you can still make forward progress with home ownership. In other words, can you move to the next destination without being stuck in the same place for an unreasonable amount of time? The 33% mentioned earlier may allow you to do so if you don’t have debts or other unbalanced expenses squeezing your budget. If you can’t make progress on your journey, home ownership shouldn’t be your next step.

Renting may not be a waste of money

“I’m tired of renting because I’m just throwing money out the door.” Really, is that the case? Don’t be ashamed about renting or feel the pressure to get into a home because others are telling you you’re wasting money. Remember you get a shelter for your money and that’s never a bad thing.

Rather, consider that renting provides you the time you need to position yourself financially for home ownership. There is no shame in renting until a home can be affordable via down payment and monthly expenses. That’s just good stewardship, my friend.

Handy Calculator

Perhaps you want to dive deeper and do some financial analysis. As I mentioned earlier there are a lot of forces involved in making a decision to buy or rent. The Crown Rent Vs. Buy calculator attempts to forecast the net effects of all the hidden forces (interest, property taxes, tax savings, appreciation, opportunity costs, closing costs, selling costs, etc.) to help you make an even more informed decision.

What would be the most important things you would consider if you were deciding to when deciding to rent vs. buy?

Jason Price is a personal finance writer at One Money Design and a Money Map Coach. His mission is helping people achieve true financial freedom.

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