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Apartment Leases or Home Mortgages—Which Is Right for You?
When interest rates were low and salaries were high, renting was seen as "throwing away money," and buying a house was a rite of passage for couples. But times have changed, and many couples are finding that the rent-or-buy question is not so straightforward.
Some couples are choosing to rent so they can move when they wish. Others are priced out of home buying entirely. Because rental fees and mortgages account for such a significant portion of a couple's expenses, it is important for couples to come together and get on the same page when decisions need to be made.
Deciding Whether to Rent or Buy
Comparing a mortgage payment to monthly rent is not an apples-to-apples comparison. There is so much more that goes into purchasing and owning a house beyond the mortgage payment. In determining whether you are financially ready to purchase a home, you need to consider those additional fiscal responsibilities to fully assess whether home ownership is the right step for you.
Pros of Renting:
Cons of Renting:
Home buying is a significant financial investment, and there are pros and cons that should be considered when deciding if it is right for you.
Pros of Buying a Home:
Cons of Buying a Home:
Ultimately, both situations have advantages and disadvantages. Sometimes, deciding whether to rent or buy comes down to a combination of a couple's financial situation and their future plans.
Co-Signers and Co-Borrowers
Co-Borrower: When a couple applies for a mortgage together, they are typically co-borrowers. This means the financial information of both partners will be evaluated during the mortgage approval process. When the mortgage is approved, both co-borrowers will have equal legal rights to the property and equal responsibilities for the mortgage. A home purchased by co-borrowers would have both names on the title.
Co-borrowers will often have larger available loan amounts than single applicants, as couples are seen as having multiple income sources. If both borrowers have good credit scores, they could also receive a lower interest rate on a loan.
There are risks involved in entering into a mortgage with a co-borrower. If your co-borrower stops paying, you are still responsible for the full payment amount. If payments are not made on time, the credit scores for both co-borrowers are impacted. If one co-borrower wants to sell the property, they will have to get the approval of their co-borrower.
Co-Signer: Another option for a loan application is to obtain a co-signer. A co-signer is a guarantor to the primary borrower. This means that while the co-signer does not typically make payments on the loan, the co-signer would be legally responsible for paying back the loan if the primary borrower defaults. The co-signer has no ownership interest in the property and cannot control how the property is used. The primary borrower is able to sell the home without getting approval from the co-signer.
A co-signer is usually a parent or family member with a higher income and/or better credit than the primary borrower. By adding a co-signer to the loan application, the primary borrower has a better chance of getting the loan approved as well as receiving a higher loan amount and a lower interest rate.
Both co-signers and co-borrowers strengthen a loan application. Knowing the legal liabilities when asking someone to be your co-borrower or co-signer is important. If payments are not made on time, this can strain the relationship.
Budgeting for Monthly Payments
There are a number of online calculators that will tell you what percentage of your income should be devoted to house payments. Some financial advisors use the 28/36 rule: Housing expenses should be no more than 28% of your gross monthly income, and your total debt payment should be no more than 36% of your gross monthly income.
The 28/36 rule is just a guideline. All couples need to determine what they feel comfortable paying toward their monthly housing expenses.
When deciding to purchase a house, some couples might be okay with being "house poor" and purchasing a more expensive property. This could mean delaying other purchases, putting off vacations and making other sacrifices. Others choose to be more conservative and allot a lower percentage of income to housing expenses to allow some of the finances to be used for home improvements, savings or other purchases.
Some couples find that this calculation leads them to choose to rent instead of buy, whether it's due to high home prices in their desired area or the inability to qualify for a mortgage.
In both situations, couples need to figure out how much they need to have available to rent or buy a home together. This might mean saving up over a number of months to obtain moving expenses and rental costs or saving up for a few years to acquire a large chunk of money for a down payment on a house.
Handling Conflicts over Housing Finances
Housing costs are one of a couple's largest expenditures, so there are often many feelings around this big expense. It is important for a couple to have trust and make this decision as a team, with both partners feeling comfortable with the outcome. If one partner does not feel as invested in the decision, there can be resentment, especially when unanticipated circumstances arise.
A couple that starts with financial transparency and open communication will be on a good trajectory to tackling financial issues as they come up. With a solid partnership, issues like job loss or unexpected expenses can be dealt with together. Regular communication helps to identify issues before they become large and more challenging to deal with.
If issues about housing finances arise, sometimes it is helpful to seek the advice of an expert. A family therapist could help a couple communicate better and understand each person's history and how it contributes to current issues. A financial advisor might help a couple see the full financial picture and provide some perspective. Asking for help early can keep the resentment at bay and lead to a quicker resolution.