In last month’s guest post, financial expert Suzanne Cramer shared the lowdown on refinancing – something that many divorcing couples have to do if one partner is keeping the marital home and has to buy out their partner. Before you get to that stage though, deciding whether you should own your home or rent should be a conscious decision and there’s much to consider. Here’s Suzanne:
Home is where the heart is. You most likely spent years in your home; raising your children, making memories, and feeling like you were living happily ever after. Then, the unthinkable happens, you get a divorce and suddenly you are left thinking about your home. Will you stay in the marital home or is it just not financially possible? Will you sell your home and buy another on your own? Or will you rent until you can gather the cash for a down payment and get yourself settled? This is a huge decision to make and shouldn’t be made in haste, but instead with careful and thoughtful planning for your future.
We are all brainwashed to believe home ownership is the best financial decision, but the reality is that is not always the case. Depending on your situation renting may be better for you. Today, many people who have been renting are in a much stronger financial position than recent homebuyers. But the combination of foreclosed homes for sale, low mortgage rates, and government assistance may have you thinking, now may be the best time to buy.
Are you really ready to buy a home?
Emotions run high after a divorce and in some instances we are not in the right frame of mind to make these life changing decisions. So you should ask yourself these questions:
- Do you plan to stay in the area? Maybe living in the same town as your ex makes you cringe. Or maybe you will begin working again after years of being a stay at home mom and there just aren’t any jobs available in the area, so you may need to relocate. By renting you afford yourself the time to make the decision as to whether or not you want to put down new roots near your old home or relocate.
- Do you like the area? Perhaps you moved to your current location so your ex could be near their family or job, the choice was not yours; now you realize you want to live somewhere else maybe closer to your family and friends. Consider if the area is truly where you want to be. If you are not sure-rent until you are.
- Is your family close by? Support is key to dealing with a divorce and having your family and friends close by may just may make things a little bit easier. Consider how important this is to you in making your decision.
- Do you have employment here? You are now on your own and dependent solely on you! Is your job in the area or will you need to relocate in order to earn what you need to make it on your own? Employment is a major factor in your decision to set down roots or give it a trial run by renting.
- Can you really afford it? How much are you paying now for rent? You should look at a good principal and interest calculator or talk to a lender to get the whole picture, including monthly amounts for taxes, insurance, any applicable homeowner’s association dues, and any applicable mortgage insurance. This is important even if you plan on paying taxes and insurance on your own (rather than impounding them and making monthly payments to the lender) because you will want to make sure to budget monthly to set aside for these expenses. So, if you are paying $1,500 currently for rent, and the new home will be $2,500, put your budget to the test and see how you do with saving the increased housing expense (in this case $1,000). Take it out right when you pay your rent, and don’t touch it. This is a great test of how much you can really comfortably afford, and of course has the nice side effect of padding your savings.
By answering these questions you can gauge whether or not you are ready for home ownership on your own. Remember, the most important factors are: do you like the location, is your career here, and can you afford it.
Okay so you have decided home ownership is a possibility for you, now let’s take a look at the pro’s and cons of home ownership.
Pro’s of Home Ownership
From a financial standpoint, there are many reasons why it’s better to own a home, as opposed to renting.
- Equity. By making monthly mortgage payments, you’ll be building up equity in your home and increasing your overall net worth.
- Tax breaks. You’ll also receive significant tax breaks as a homeowner with a mortgage. The interest you pay on your mortgage each year is tax deductible.
- Stability. Once you’ve purchased your home and have a fixed rate mortgage, your housing costs will remain constant for the life of the loan vs. dealing with annual rent increases.
Con’s of Home Ownership
From a financial standpoint there are also several reasons why it’s better to rent.
- There are no guarantees. Even if you work hard at maintaining your home, property values can drop, depending on the neighborhood in which you live. Can you say short sale? Foreclosure?
- Owning cost more overall (typically). Mortgage payments are generally higher than rent, and include the added costs of home repairs and maintenance. As an owner, you must pay for any unexpected costs such as a new roof or heating system.
- Downsizing when times are tough-not easy. When you own a home and fail to keep up with your mortgage payments, you may be foreclosed upon. This could result in the loss of your home as well as the equity you’ve built. A renter, on the other hand, can downsize to a cheaper apartment to cut expenses.
- You lose flexibility. Owning a home usually makes moving difficult and complicated. After you purchase a home, you may not have as much flexibility in choosing a new location to live or work. That’s why it is important to ask yourself the above questions to ensure you are ready.
Regardless of the choice you make be sure that the home you rent or purchase is one you can afford. Compromising on the home or taking on debt you can’t handle will only lead to problems and disappointment down the road. Acquiring a new home and taking on the responsibilities of home ownership results in significant life changes – usually for the better. As someone who is looking to rebuild their life after a divorce, make sure becoming a homeowner is a set of financial and emotional responsibilities you’re willing and able to take on.
The Divorce Coach Says
Deciding where you want to live is the first step and you may not have total freedom in that decision. If you have children, then their schooling will be a major factor and proximity to your STBX for their parenting time may be another.
My ex and I stayed in the same town because we both agreed the kids should continue at their schools. We also agreed that we wanted as much as possible about the kids’ social lives to stay the same. That meant staying to close their friends. The best part about living in the same town has been how easy it is for the kids to stop by if they forget something at the other parents’ home.
If you’re not certain about your future whether that’s financial, career or location, then I would say strongly consider renting. Renting is another good strategy if you want to take your share of the equity from your marital home and use that to cover your living expenses while you train for a different career or work towards your financial independence after being a stay-at-home-mom. It would also be a legitimate strategy if you wanted to find a way of working part-time while your kids were still in school.
The key point here is not to just assume that because you owned your home before, you should own a home now. This is a great opportunity to evaluate what is in your best interests, given your new circumstances.
If you do decide that now is not the time to buy or that you need to save some more for a deposit, then you can put the money you have to work for you by investing.
“Investing is one of the most important things you can do for yourself. It can build your wealth….not by a little, but by enough to make a real difference in your life,” said Sallie Krawcheck, CO-Founder & CEO of Ellevest.
Investing is not as complicated as it may seem. You may think from listening to others talk that they’ve figured out the stock market, know when to buy, know when sell but the truth is they don’t. No one can predict exactly when investments will go up or down and very few out-perform the market consistently.
On average, the market has returned 9.5% annually since 1928 so you don’t necessarily have to pick stocks or “beat the market” to get a return on your investment. And, you don’t need a lot of money to start investing. Ellevest is one company that requires no minimum to open an account.
You can started today by setting your goals and putting your money to work for you. Visit Ellevest to take advantage of their free Investment Plan. What are you waiting for?
I’m excited to be working with Ellevest to start conversations about women and money. I may receive compensation if you become an Ellevest client.
Photo credit: Images_of_Money