7. Should You Rent or Should You Buy?

Question 1

What was the purchase price of the author’s grandparents’ home in 1972?

Answer 1

$28,000

Question 2

What is the current estimated value of the author’s grandparents’ home?

Answer 2

$600,000

Question 3

What emotional returns can home ownership provide?

Answer 3

Stable foundation to raise a family, priceless memories

Question 4

What are the one-time costs associated with buying a home?

Answer 4

Down payments and closing costs

Question 5

What percentage of the home’s purchase price should first-time buyers expect to put down?

Answer 5

3.5%–20%

Question 6

What are typical closing costs for buying a home?

Answer 6

2%–5% of the home’s value

Question 7

What is the typical commission charged by real estate agents?

Answer 7

3% of the home’s sale price

Question 8

What are the ongoing costs of home ownership?

Answer 8

Property taxes, maintenance, and insurance

Question 9

What is private mortgage insurance (PMI) typically required for?

Answer 9

When putting down less than 20% of the home’s value

Question 10

What is the recommended budget for annual maintenance costs of a home?

Answer 10

1%–2% of the home’s value

Question 11

True or False: Homeownership is generally less risky than renting in the short term.

Answer 11

False

Question 12

What are the primary costs of renting?

Answer 12

Long-term risk, housing instability, and ongoing moving costs

Question 13

What is the inflation-adjusted return on U.S. housing from 1915–2015?

Answer 13

0.6% a year

Question 14

What major factor affects the opportunity cost of investing in housing?

Answer 14

Comparison to other asset investments

Question 15

What is the average homeownership rate in the U.S. as of 2019?

Answer 15

65%

Question 16

What percentage of total assets do the lowest-income households have in housing?

Answer 16

Nearly 75%

Question 17

What conditions should be met to determine the right time to buy a home?

Answer 17

• Plan to stay for at least ten years
• Stable personal and professional life
• Can afford it

Question 18

What is the estimated transaction cost of buying a home?

Answer 18

2%–11% of the home’s value

Question 19

How long does it typically take for a home to appreciate enough to offset a 6% transaction cost?

Answer 19

Ten years

Question 20

What factors can make buying a home riskier?

Answer 20

Instability in personal or professional life

Question 21

What does the author suggest about the emotional aspect of holding U.S. stocks compared to homeownership?

Answer 21

Holding stocks is emotionally harder due to market fluctuations

Question 22

What financial risk is associated with taking out a mortgage in unstable conditions?

Answer 22

It may put your finances at risk

Instability increases the likelihood of higher transaction costs in the long run.

Question 23

What is the ideal debt-to-income ratio to qualify for a mortgage?

Answer 23

43%

This is the maximum ratio for a mortgage to be considered lower risk.

Question 24

How is the debt-to-income ratio calculated?

Answer 24

Debt-to-Income Ratio = Monthly Debt / Monthly Income

This ratio helps assess financial health when applying for a mortgage.

Question 25

If your monthly gross income is $5,000 and your mortgage payment is $2,000, what is your debt-to-income ratio?

Answer 25

40% ## Footnote This calculation assumes no other debt payments.

Question 26

Is it mandatory to put down 20% when buying a home?

Answer 26

No, but it is recommended ## Footnote Being able to put down 20% indicates financial responsibility.

Question 27

What advantage does a larger down payment typically provide?

Answer 27

Affords a more expensive and likely bigger home ## Footnote A larger down payment can also reduce monthly mortgage payments.

Question 28

What is the recommended strategy regarding buying a starter home versus a bigger home?

Answer 28

Wait for the bigger home ## Footnote Buying a starter home may incur higher transaction costs if sold within a few years.

Question 29

Why is the first few years of homeownership considered the riskiest?

Answer 29

It involves the highest financial uncertainty ## Footnote Initial years are crucial as income may grow, but mortgage payments remain stable.

Question 30

What happened to mortgage payments during the high inflation of the 1970s?

Answer 30

They were effectively cut in half in real terms ## Footnote This provided long-term homeowners with significant financial relief compared to renters.

Question 31

What should be prioritized when deciding to buy a home?

Answer 31

Personal and financial situation ## Footnote Homebuying is often the largest and most emotional financial decision.

Question 32

What is the focus of the next chapter after discussing homebuying?

Answer 32

Best ways to save up for a down payment ## Footnote Preparing financially is crucial for prospective homebuyers.

Question 33

Fill in the blank: The debt-to-income ratio is defined as __________.

Answer 33

Monthly Debt / Monthly Income

Question 34

True or False: A lower debt-to-income ratio is better.

Answer 34

True