Originally, I titled this post, “To own or to rent?  That is the question.”  But that sounded far too cliché.  So I modified the reference just a bit.  Too cheesy?  Or too opaque?

Anyway, there was an interesting post on Zillow the other day about how to decide whether to rent or to buy a home.  Now that the real estate market is down in so many areas, it is a good time to buy, but buyers are understandably jittery: “Is this really the bottom?” they ask.  “Will it be a good investment?”  “Will I lose my money and end up in foreclosure like some people who bought three years ago?”

The answers are: Yes, at least close; Absolutely, over the long term; and Not if buying a home fits within your budget and lifestyle considerations.

Okay, that last question is more difficult to answer.  How do you decide whether renting or buying makes more sense?  To really get at a good answer, you have to consider a few factors:

1.  Could you afford to buy a home in the area you want to live in?

If you’re set on the area you want to live – say, it’s close to your work or your kids go to school in the district, and you absolutely don’t want to move out of the area, then the natural first question to ask yourself is whether you could really afford to buy in that area.  If the answer is no, then renting is the obvious choice.

Remember, when I say “afford to buy” I mean it.  No more of this “I could afford it at a low teaser interest rate, as long as my home appreciates 25% in the next year and I can refinance into a much lower fixed rate.”  There are way too many “ifs” and “as long as” statements in that sentence.  If you can take out a sensible mortgage and your total debt payments (including the mortgage) are still less than about 40% of your income, you probably can afford the house (of course, that’s a generalization – everyone’s situation is different).

2.  What’s the difference between rental prices and mortgage payments?

Sometimes, you can rent a home comparable to what you would buy for much less; other times, the rental price is much higher.  To check out median rental prices in your area, check out rentometer.com.  To get a very general idea of what you might pay in a mortgage, bankrate.com has a good calculator.

3.  Do you plan to stay put for a while?

Most American homeowners move every 6 years or so.  Generally, if you’re planning to stay in a home less than 3 years, you’d be better off renting.  And remember, the shorter the time you can stay in the home, the more likely you are to feel forced to sell during a market bottom.

4.  Where’s your balance between risk and reward?

The risk of home ownership, of course, is that your investment could lose value.  The reward is that, over time, your investment will gain value – at a far better rate than an investment in the stock market, for example, would (to see how the math works out, check out this blog post).  When you rent, you don’t take on the risk – but you also don’t reap the reward.

5.  Are you cool being subject to someone else’s decisions?

While the law gives renter’s some protection (your landlord can’t tell you to move out in two days, for example – unless you haven’t been paying the rent), you are subject to another person’s decisions.  If your landlord decides to sell, that means you have to move – with all of the associated hassles, expenses, and – often – heartaches.

Unfortunately there’s no easy answer to the rent or own question.  But considering the five factors I’ve outlined above will help you get close to an answer you can be comfortable with.