Renting vs. buying: Right move depends on your circumstances

Knowing when and how to buy a home in the current market can feel like an insurmountable challenge.

Between a new report that found renting is cheaper than buying a home in the fifty largest metros and the long-held belief that building equity through homeownership is important for accumulating wealth, both renting a home and buying a home can be appealing options, depending on your circumstances.

READ: Start Investing in Real Estate — 6 Tips for Millennials

As a result, prospective homebuyers are feeling increasingly uncertain in today’s homebuying landscape.

According to Bank of America’s new Homebuyer Insights Report, 57% of prospective buyers and current homeowners are unsure whether it’s a good time to buy, compared to 48% at this time last year. This trend is even more prevalent among first-time homebuyers, as 62% shared they’re unsure what to do.

There are several factors that might be leading to this sense of uncertainty — in Colorado, the average home value is $553,692, up 2.0% from last year, according to Zillow. In Denver, homes are averaging over $579k, up 0.7% from last year.

READ: Housing Affordability Crisis in Colorado — Denver, Colorado Springs and Grand Junction See No Signs of Improvement

While many may be waiting for the Federal Reserve to cut interest rates from levels not seen in decades, once rates drop, homebuying competition will increase.

Bank of America’s report found that among prospective buyers, 81% said that renting is temporary and suits their current stage in life, and 76% are planning to buy a home within the next five years.

One reason these numbers are so high, despite elevated interest rates: Both current and prospective homeowners see widespread financial and emotional benefits to owning a home over renting.

Nearly 90% of homeowners said that owning a home brings emotional fulfillment rather than added stress and 67% of prospective homebuyers would prefer to own a home for the sense of permanence and emotional stability it provides, rather than the flexibility of renting.

Buying a home is an inherently personal decision. Prospective buyers must weigh their financial situation, current interest rates, and preferred living location. While renting might be the best choice for you right now, if you are interested in buying a home within the next few years, there are key steps you can take to prepare your finances and put yourself in a stronger position:

• Prioritize your credit score: A higher credit score can make it easier for you to get a loan or borrow at more favorable rates. To build your credit, you should work to pay bills on time, keep credit balances low, avoid closing old credit accounts and avoid taking on new credit unless absolutely necessary.
• Save, save, save: Having cash at the ready to buy a home can help you tackle down payments, maintenance costs and any unexpected expenses that may come when buying a home. You can build your savings by creating a spending plan, sticking to it, and being kind to yourself. Only spend what you can afford and save the rest.
• Minimize debt: There are a few key approaches you can take to reduce your debt. Target one debt at a time (highest interest debt first), always make at least the minimum payment on your credit cards and loans and consolidate debts when you can.
• Familiarize yourself with buying conditions in Colorado: While inventories are still at historic lows, we are seeing some relief for homebuyers. Realestatecenter.bankofamerica.com is a great tool to search local markets, see inventory, identify grant and down payment assistance eligible properties and much more.  Local expert real estate agents are also a great resource for market information as well.  

While buying a home can be daunting, the most important thing you can do is to start early and familiarize yourself with the process.

Taking stock of where you are at financially, understanding the budget you may be approved for and getting a sense of what that budget can buy will prepare you to take that next step when the time is right for you.

Chris McClain is a Colorado Realtor/Builder Lending Market Executive for Bank of America.