It’s always worth thinking long and hard about buying a house, especially now in such an interesting real estate market. Home values in Colorado continue to climb but at a slower pace than at the height of the pandemic in 2020 and 2021. Then there’s the fact that many prospective buyers are holding off on a new home purchase because they’d rather not contend with rising mortgage rates.
Renting, meanwhile, also comes with several challenges. While you may not be responsible for HOA fees, property maintenance, or homeowners insurance, you are prone to costly rent hikes. You could end up paying more as a renter than a homeowner with a mortgage.
In this article, we take a closer look at renting vs. buying. You’ll find that making the right decision often depends on your personal and financial goals.
Pros and cons of buying a home in this market
- Build significant equity right away – Many Coloradans saw their home’s value increase by over 20% last year. Think about that for a second — that’s thousands of dollars, if not tens of thousands, added to their property’s value in such a short amount of time. You may not experience such a trend with your home purchase, but you’ll still benefit from solid equity growth if you buy in this market.
- Avoid higher home prices in the future – Experts predict a gradual cooldown in home prices over the next few years. But don’t confuse a cooler real estate market with a crash. Whereas a cooler market means a return to slower price growth, a crash involves homes decreasing in value and homeowners owing more than what their property is worth (also known as being underwater on their mortgage). That’s why it’s a good idea to enter the market now and take advantage of these prices before they’re gone.
- Easy to create your dream home – Maybe you don’t have the funds at this stage of your life for a new build or an existing residence with new furnishings and a finished basement. There’s nothing wrong with that! Instead, you might consider purchasing more of a fixer-upper. Doing so could help you afford more home in the current market and give you the flexibility to create the home you’ve always wanted.
- Might need a large down payment – One of the first things a lender asks when discussing home financing is what kind of down payment you have. Even though you don’t need to put down 20%, remember that the average down payment is anywhere from 6-10%. Still, a 6% down payment on a $500,000 home comes out to $30,000. Many Coloradans don’t have anywhere near that amount in savings, let alone for a home purchase. That’s why our agents recommend low-down payment programs, such as FHA and VA loans.
- Could be up against multiple offers – Shopping for a home in a low inventory environment can be frustrating. You might come across the perfect residence at an affordable price, only to be outbid by another buyer. This scenario played out routinely in 2021 and early 2022 but has become less common with higher interest rates. A good agent will tell you that there’s always the possibility of a bidding war and that you need to decide how much over the original asking price you’re willing to offer.
- Must have necessary funds for ‘other’ home expenses – A home purchase involves more than a monthly mortgage payment. You’ll also budget for those other housing costs, such as homeowners insurance, property taxes, and HOA fees. On top of that, it’s worth setting aside some funds every month to cover the occasional repair or improvement project. When you factor in these additional costs, you might discover that buying a home isn’t in the cards for the time being.
Pros and cons of renting a home in this market
- Easier to move or relocate for work – Take a moment to think about future work situations. Is there a possibility of relocating with your company or switching fields entirely and moving across the country? In either case, renting could be the more cost-effective option.
- Landlord handles property maintenance and upkeep – Renters benefit from relying on their landlord for any repairs or maintenance. So, if there’s a leak from the kitchen sink, you don’t have to worry about trying to fix the problem yourself or how you’ll afford to call a professional. The flip side is that you can’t do much to the residence without prior approval from your landlord.
- No need to worry about interest rates – Many prospective homebuyers check interest rates multiple times daily, hoping they drop even the slightest. If you’d rather not deal with this additional stress, renting is likely the way to go.
- Unable to build your own equity – One major downside of renting is that your money goes to your landlord every month, and that’s it. Instead of building equity for yourself, you’re helping your landlord grow their wealth. Plus, you won’t benefit from future higher home values if you choose to rent.
- Susceptible to rent increases – Rent prices in Colorado have skyrocketed since last year. That’s especially alarming if you’re on a tight budget and can’t afford an additional several hundred dollars on your rent every month. Mortgage payments, on the other hand, never increase unless you opt for an adjustable-rate loan.
- Your landlord could decide to sell the residence – Think about what you might do as a landlord in this market. With home values at record highs, you could decide to cash in on your property. Renters in this situation have no say about what their landlord should do.
Questions to ask before making your move
- How long will you stay? – You must live in your home for at least two years to avoid a capital gains tax. If you think it’s unlikely that you’ll stay in a certain location for that time, it may be better to rent for a few more years.
- Will you be happy with your home and nearby surroundings? – You know the real estate phrase “location, location, location.” Check that your new home is in a good neighborhood and school district if you have children. If the community has an HOA, look into the amenities at your disposal, including a pool, fitness center, or workspace.
- What challenges will you face with owning or renting? – Every homeowner and renter has their challenges. While you might initially be hesitant to learn about home maintenance, it could be a better alternative than relying on your landlord all the time. Again, it’s about assessing your situation and future.
- Will you need to make sacrifices to afford a house? – For many folks, the answer is yes. You may have to cut your entertainment and restaurant budget in half to afford your first home. Other ideas include ditching subscription services, picking up a side hustle, or selling items you no longer use.
- Is it cheaper to own or rent in Colorado? – According to Insider, the median monthly mortgage payment in Colorado is $1,845. RentCafe tells us that the average two-bedroom rent in Denver is $1,879. That said, it’s certainly possible that buying a home would be cheaper than renting for many Coloradans, especially long-term.
Are you ready to start the home buying process? Call American Home Agents at (303) 695-5900.