You know the traditional wisdom about buying a home. But with a market that, post-pandemic and mid-inflation, has been turned on its head (high interest rates! low inventory!), how do you make the right call? Here are 3 tips from Loan Depot’s Chief Credit Officer Brian Rugg that just might help you make a decision.
Should You Rent or Buy? Here Are 3 Real Estate Insider Tips to Help You Decide
1. Don’t Base Your Decision Solely on Interest Rates
For many, interest rates can feel like the single most important thing when it comes to buying. According to Rugg, they’re not. “If you wait too long for the ideal market conditions, you may miss out on an opportunity to start building equity,” he says. Because, yes, rates are higher today than they have been in recent history (the national average is hovering around 6 percent), but, per Rugg, they’re still very low. (When he bought his home in 2000, the rate was 8.5 percent—still considered a low rate at the time.) They’ll also always fluctuate. “Home buying should be based on multiple factors: Can you afford to buy? Does it make sense for your situation in the short-term and beyond? Things like that. Is there a benefit to waiting for ideal conditions? No, because here’s the rub: The longer you’re paying rent, the longer you’re building wealth…for someone else.”
2. Use the ‘BURL’ Investment Rule
The ‘BURL’ rule (coined by Sam Dogen, a real estate investor) stands for Buy Utility, Rent Luxury. Dogen defines utility as a home with very little unused space and essential-to-you amenities (say, a dishwasher, or a backyard if you’ve got a dog). On the flip side, luxury is anything beyond the essentials—say, an extra bedroom or a swimming pool. Basically, you want to be sure that if you are investing in real estate, you’re not over-paying for things you don’t need and maybe won’t even benefit from. (In other words, what’s the opportunity cost if you skip the pool?)
Rugg maintains this rule is helpful as long as you understand that the difference between utility and luxury is a moving target. “During the pandemic, people actually found that things once perceived as luxury, such as an extra bedroom, became utility because they needed a home office to work remotely. However, now we’re seeing stories of homeowners who may have overspent to get that extra space, which puts it back in the luxury territory.”
3. Don’t Let Your Total Housing Payment Exceed 40 Percent
Your total housing payment encompasses a lot: Your monthly mortgage principal, interest, homeowners’ insurance, property taxes and HOA dues (known as PITIA, which stands for principal, interest, taxes, insurance and association dues). As you budget for home ownership, Rugg says this payment should not exceed 40 percent of your family’s monthly gross income (meaning before taxes and other deductions). “Generally, you should try to stick to 36 to 38 percent of your gross household income,” he says, though he adds that he personally would go up to 40 percent. So, if you and your spouse collectively earn $180,000 annually, your all-in monthly payments shouldn’t exceed $6,000. His reasoning: Home ownership comes with fees beyond the mortgage payment. You need to project what those expenses really are so you don’t get in over your head.