On the hunt for a new place to live? Before you even start looking, ask yourself a crucial question: Should I rent, or should I buy? Finances matter, of course, but so does your lifestyle, your future plans, where you wish to live, the size of your family, and the state of the economy and housing market. The answer isn’t always clear-cut, but this second chapter in our series of home-buying articles may help.

Pros and cons

Buying a home offers many advantages. There’s the sense of stability, the opportunity to build equity, the protection from unexpected rent increases and the freedom to customize your living space without a landlord’s approval.

There are also drawbacks. Property taxes can cost homeowners hundreds or thousands of dollars a month. A lack of flexibility roots homeowners in one place and makes it complicated to leave (the flip side to that sense of security). And when you own a home rather than rent it, the cost of maintenance, repairs and big-ticket items like a new boiler or roof are entirely on you.

A financial gut check

First and foremost, the decision to rent or buy will depend on your financial situation. Unless you’re independently wealthy and ready to purchase a home with cash (if you are, why are you reading this article?), you’ll need to qualify for a mortgage.

Doing so depends on more than just your bank balance, though savings matter: Even if your income will cover your expected mortgage payments, buyers with cash socked away are better positioned to make a down payment and meet the additional costs of homeownership, which include closing costs, homeowners insurance, taxes and maintenance.

What lenders want

Lenders look for financial stability in loan applicants, so if you’re earning a steady paycheck, you have a leg up. Your credit score is going to matter, too, so if you’re carrying debt, have a history of maxed-out credit cards or are late paying bills, you’ll want to focus on cleaning up your balance sheet before applying for a mortgage. Don’t be discouraged — there are home loans designed specifically for borrowers with lower credit scores — but in general, you’ll need a score of at least 620 to secure a loan.

How much of your income will go toward your mortgage and other debt is important: Most lenders require that no more than 35 percent goes toward your housing expenses and other unavoidable bills. So if you don’t see yourself being able to keep your household expenses below that threshold in the near future, you’ll probably have to hold off on buying a home.

Flavors of loans

A mortgage is not a one-size-fits-all product. A 15-year-fixed-rate mortgage offers a lower interest rate in exchange for a higher monthly payment, while the 30-year version offers a higher rate and lower monthly payment, but a higher total cost over its longer term. Adjustable-rate mortgages, also known as ARMs, have fluctuating interest rates.

A cash deposit of 20 percent of the purchase price is a typical requirement, but specialized mortgages for veterans, first-time buyers and others allow low, or sometimes nonexistent, down payments. A future article in this series will take a deep dive into mortgages, but for a primer on them and other real estate terms you might encounter while shopping for a home, take our home buyer’s vocabulary quiz.

The state of the market matters

Interest rates hit rock bottom during the Covid-19 pandemic but are now soaring along with home prices, driving up the cost of homeownership. This has prompted many buyers to put their searches on hold. Sellers have also had to cool their heels — after all, they usually have to move somewhere else after selling, which comes with all the problems buyers are having.

But it’s not just a mortgage’s interest rate that makes a difference: The real estate market affects home prices and rents as well, and how much you pay will depend on where and when you’re searching (like the mercury, home prices tend to drop in the winter and rise in the summer). The same buyer who is well qualified to purchase a home in Youngstown, Ohio, where the median home listing price is around $115,000, may not have the financial pedigree to rent a one-bedroom apartment in Manhattan, where rents currently hover above $4,000 a month.