If you are newly divorced or about to be, and faced with moving you of the marital home, you’re probably weighing deciding to buy or rent after divorce. It’s a major consideration with the potential for significant emotional and financial implications either way. Check out the list of questions to ask, factors to consider, and a nifty tool to weigh the costs before making your decision to buy or rent.
In 2011, I found myself in the buy or rent dilemma. Because I could not afford our 3,000 square foot marital home on my income, I was the one to move. At the time my ego won out over everything else, and I ultimately purchased a home in another town.
While I didn’t immediately regret my decision, I soon realized the shortsightedness of it. In these past seven years, I’ve moved two additional times and learned much more about real estate, personal finance, and myself. I hope to help you learn from my experience.
Deciding To Buy or Rent After Divorce – Each Hold Pros and Cons
Buying a home has typically been a plus factor in evaluations of financial success while leasing has often been perceived as “throwing your money away.” However, with the housing crisis not yet a forgotten memory, and younger generations on the move, opinions are changing. Now, thoughts of a dream home are not so dreamy, and the benefits of renting are proving popular.
The typical pros for buying sound like this:
- A home is yours, and you can paint, remodel, and decorate any way you want
- Once your mortgage is paid off, you own it completely, with only maintenance, property taxes, and insurance costs remaining
- Homes generally appreciate in value
- Improvements to the home may allow you to ‘earn’ money when you sell
- Tax credits may help to reduce some of the ownership costs
On the flip side, here are common renting pros (or buying cons):
- Renting is not throwing your money away, it’s simply securing a temporary place to live
- With renting you aren’t on the hook for emergency repairs or maintenance costs for the property
- Costs for insurance, and often utilities too, are lower
- There’s no personal financial concern if the property increases or decreases in value
- Purchasing a home ties up a large sum of money while also tying you down more permanently
- Owning property comes with the additional monthly costs of taxes and mortgage interest
All these factors do not weight equally, however. To effectively compare renting to buying after divorce you need to know the whole story.
Start With These 6 Questions When Deciding To Buy or Rent After Divorce
- What do you need? First list out what you need in a home before you start on your list of wants. Consider who will be spending overnights in the house and what space is required. Sure you may want room for a home office, gym, play area, and your car restoration project, but is it a bona fide need? It is entirely possible to meet all your needs with a rental property, and maybe even a few of your wants. Attempting to purchase them all, however, may cause you to overextend yourself financially.
- How long are you planning to stay in your next home? Buying and selling a home involves costs, far beyond the purchase price. Realtor and attorney fees, inspection fees, appraisal fees, mortgage origination fees, and title insurance costs are among those to consider.These additional costs may make owning a home far less practical unless you remain in the property more than a couple of years. Selling within the first few years, might not give the home time to appreciate enough to balance out the additional costs.
- What’s the likelihood of house prices rising? In recent years the housing market showed us it falls and stagnates as well as it grows. How would your overall financial life look if your house’s value increases slower than the market, does not increase at all, or decreased suddenly? Your home may not be an investment at all, only an expense.
- Will you be eligible to save on taxes by buying? While it’s true some buyers can balance additional costs of homeownership with tax savings via the mortgage interest deduction, not all do.You must be able to itemize tax deductions to receive the benefit. With your new marital status, your tax-filing situation will be different, and your deductions may change. Speak with a tax expert to understand your potential tax savings if any.
- Are you financially stable right now? Divorce usually impacts your financial life dramatically. If you currently hold any debt, face alimony or child support payments, and are behind on your retirement savings, now may not be the best time to make a significant purchase.
- Are you emotionally stable right now? This may indeed be the hardest question to answer while also being the most important. Divorce is stressful. In fact, it is number two on this list of the 10 most stressful events of life. While you may know that logically, you may not fully understand yet how it’s affecting you.
Rushing into a decision to purchase a home may only lead to more stress down the road. Speak with a close friend, family member, or a professional if you need help sorting through your emotions.
To Buy or Rent, the Financial Comparison
Accurately comparing the financial difference of renting or buying requires you to factor in the entire cost of home ownership —not merely the monthly mortgage payment versus rent payment Additionally, you want to look at the overall money picture.
For example, consider if finances not tied up in a home could earn you more through investing in a diversified index portfolio, thereby improving your overall net worth and financial security.
“Rather than simply focusing on monthly or annual costs of the buy versus rent decision, consider which option would have a greater positive impact on your overall wealth at the end of your stay. For example, let’s say your total costs of ownership were $2,000 a month and you could rent a similar property for $1,800 a month. You might consider how that additional $200 a month could grow if you were to invest it in a diversified portfolio and compare it with all the home equity you will build up during the same time through your mortgage payments.” – Fidelity Investments
You can run a simple rent vs. buy comparison by looking at the price-to-rent ratio. Taking the home value and dividing it by the annual rent amount calculates this. In general, when the price-to-rent ratio is higher than 20, renting looks to be the better option. If the ration is less than 20, buying may be the better way to go. Any comparison, however, is only beneficial when you are comparing similar properties.
A sophisticated, yet easy to use online tool that requires a few additional inputs does the calculations for you – found here.
It’s Not Just About the Money
When weighing the differences between the homes you’re considering, take into account the non-monetary benefits of each as well. Does one offer the outdoor space or ideal location you desire? Will one keep you closer to your children or ease your daily commute?
I failed to do any of the above when deciding to buy or rent after divorce and jumped into buying a home quickly. Fortunately, it ended up being a positive financial move even though I sold it two years later, but it was the wrong move on an emotional level. Just a few months in I realized I should have listened to my brother and best friend and leased a property first.
When you are coming out of a divorce, you’ve no idea what your life will be like even one year later. Give yourself some time to get accustomed to your new life. And your kids will do just fine in an apartment or rented home.
The Bottom Line
Renting or buying can each work in your favor. Yes, owning a home may be beneficial over an extended period but renting may be the best option today.Ask and answer the hard questions and crunch the numbers. Then make the best financial and emotional decision you can for you and your family, with all the information in hand.