Money Myth: It’s better to buy than to rent


LITTLE ROCK — Conventional wisdom says buying a home is better than renting, but that doesn’t apply in all situations, said Laura Connerly, assistant professor for the University of Arkansas System Division of Agriculture.

“A house is usually considered a good investment because, traditionally, houses appreciate, or rise, in value over time,” she said. ‘”However, there are some circumstances when it may be smarter for a consumer to rent, rather than own.”

Connerly has some questions to ask to help determine whether renting or buying is better.

How long will you live in the area? “The rule of thumb is that you should plan to be in the house for at least three years,” Connerly said. “It takes about that long to recoup closing costs and other fees. Also, it takes time to build equity and for your house to start to increase in value.“

Are housing prices stable? Look specifically at housing trends in the neighborhood where you plan to buy. “The house won’t be a good investment if property values are declining,” she said. “Compare your potential increase in value with the rates of return on other types of investments. You might receive a higher return on your investment if you put your extra money into something other than a mortgage payment. Connerly said a potential buyer may also want to consider the local housing market and whether there would be a pool of potential buyers if you plan to sell within the next few years.

Are you financially secure? Connerly said consumers should plan to spend about 25 to 30 percent of their income on housing. That includes taxes, insurance, and maintenance as well as the mortgage payment. “Make sure that you are financially secure before you commit to a debt the size of a mortgage,” she said. “Live within your income. Have a low debt to income ratio — below 10 percent. Build a robust emergency savings fund — enough to cover at least three to six months of expenses. Purchase adequate insurance coverage so that you are protected in case of a crisis.”

For more information about managing finances visit www.arfamilies.org/money.htm or contact a county extension agent.