Rent or Own a Home? Four Factors to Help You Decide

Here are four considerations to help you decide whether to rent or own a home.

ByABC News
April 28, 2013, 8:00 AM

April 28, 2013 — -- intro:

At this time, when housing prices are starting to rebound and interest rates are still very low, a lot of people are saying that you should buy a house in 2013. But is homeownership the right choice for your finances? The answer of course, is "it depends." However, for many of us there is a clear answer based on where we live, how much money we have saved up, and what our future plans are.

The "Rent vs. Own" debate has been raging for decades, and will no doubt continue for many decades to come. Here are some important factors you should consider to help determine whether renting or owning a home is the right decision for you.

quicklist:title: Basic Market Trendstext:

Have you ever heard the saying that the three most important criteria in setting the value of a home are "location, location, location." Well, that remains true today, but they might want to add: "timing, timing, timing."

Anyone who watched the gut-wrenching rise and fall of the housing market during the past 10 years can readily attest to the fact that timing has a lot to do with whether a house purchase becomes a good investment or metaphorical anchor tied to your finances.

Just looking at a graph of the Case-Shiller index shows how rapidly home values can increase and decline. The line on the graph looks like a roller coaster -- it goes up and up and up and then drops back down, all in the span of a few years. You want to avoid buying a house at the peak of a housing bubble, obviously!

But how to avoid it? To help you navigate these market variations, I'd recommend using something called the "price-to-rent" ratio. This is a formula that takes into account the price of renting versus the cost of buying in your area (with many factors included) and gives you a sense of whether the market dynamics favor buying or renting. If you are trying to evaluate this, look online for some handy calculators/charts/graphs that show you the price-to-rent ratio for your city.

Also remember that interest rates for mortgages fluctuate over time and it's always better to lock in a low interest rate if you can.

quicklist:title:Your Financial Picturetext:

One of the main considerations you have to make is this: does your current financial picture put you in a strong position for home ownership? If not, then buying a house will not be a good idea no matter what the market trends indicate.

To evaluate your finances and see if you're prepared for homeownership, you'll need to sit down and look at all your financial accounts as well as your income and expectation of future earnings (not to mention job security).

First, look at any debt you have and calculate how long it would take you to pay it off. If you have a lot of consumer debt and especially if you're struggling to make your monthly payments, then this may not be a good time for you to buy. After all, homeownership is a big commitment and if things go wrong you can end up on the hook for a big loan. You also won't be able to secure a good interest rate if your debt to income ratio is high.

With student loan debt -- something Americans of all ages are dealing with right now -- you can certainly buy a house as long as the monthly payments will not overwhelm you.