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By Transamerica / Mar 23, 2015

Should I Rent Or Buy: The New American Dream

rent_vs_buy

Between the 1950s and early 2000s, buying a home wasn’t just the American Dream—it was almost always the smarter financial decision. Many Americans considered a new home a surefire investment that provided security and stability for their family.

That all changed in 2007 when the housing bubble burst. Household incomes and home values bottomed out, forcing millions of hardworking people to reevaluate the American Dream and ask themselves this all-important question: Should I rent or buy?

5 key questions to consider first… 

  • Location: Where do you want to live?
  • Time: How long do you plan to live in your new home?
  • Credit: Is your credit score good enough for a fair loan?
  • Income: Is your desired monthly payment less than 30% of your salary?
  • Risk: Are you prepared to handle a financial setback?

TA_RentVsBuy_R4-03

Kelly’s analysis: Buy.

Kelly’s monthly spend should be less than $3,685—or 30% of her net household income—in order to provide a healthy, balanced lifestyle for her family. A beautiful $600,000 home in Detroit would only end up costing her about $1,600 per month, versus $2,500 for a similar rental.

X-Factors: Detroit’s housing market is on the upswing and she could end up making good money on the investment down the road.

Zack’s analysis: Rent.

Zack’s recommended monthly spend should be less than $1,100—or 30% of his net income—in order for him to maintain a healthy, balanced lifestyle. A $500,000 home would cost him roughly $1,800 per month—or more than 48 precent of his net come.

X-Factors: Zack has an erratic spending history, virtually nothing in the bank and leads an on-the-go lifestyle.


 

*All assumptions based on fictional characters and intended only to demonstrate the above hypothetical scenario. Mortgage calculations were determined by using the standard formula for a fixed-rate loan: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1].

**Income tax rate only takes federal taxes into account. The above scenario does not factor in individual state taxes, which may include additional charges.

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