Are you better off renting or buying a home? Three tests can help you decide:

The affordability test

  • Can you really afford the loan payments? Ask yourself (and read "8 signs you're ready to buy your first home").
  • Are your total debts manageable? Add all monthly payments for the mortgage, property taxes, homeowners insurance and mortgage insurance, plus credit cards, car loan or lease, medical bills, college loans, child support and other debts. Divide the total by your monthly pretax income to get your debt-to-income ratio. MSN Money financial columnist Liz Weston advises keeping it at 36% tops -- ideally, less.
  • Can you make the payments? Look up current interest rates, and then use this affordability calculator to find how much you can reasonably spend (not just borrow).
  • Do you have the credit? You may have to use more restraint than the bank or the government.

The quick-exit test

You can't assume, as buyers did during the housing bubble, that you'll simply sell when you want out. The big picture includes planning your exit.

A big down payment gives you some protection. The more you contribute, the greater your maneuvering room in case you must exit.

But the standard down payment with the popular Federal Housing Administration mortgage, for example, is 3.5%. On a $150,000 home, that means your only equity, at first, is your $5,250 down payment. The typical cost of a sale is 8% of the purchase price, leaving a quick-exit buyer thousands of dollars in the hole even if the home's value stays the same.

Renting, on the other hand, lets you easily pick up and go, if necessary -- to another city, another neighborhood or a cheaper place, or even back with the folks. At the worst, you lose a deposit.

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There are no fees, points or interest payments to get in. Amassing a first and last month's rent, plus a damage deposit, can seem like a lot, but it's cheaper than throwing cash into a short sale, ruining your credit in bankruptcy or foreclosure or, as is happening frequently, getting sued by your lender for walking out on the mortgage.

The 'duh' test

Do you honestly know what you're getting into? Many people apparently don't understand their mortgages. You need to understand not what your salesman or lender tells you about a loan, but what the contract says. Get help from a real-estate lawyer or nonprofit housing counselor, someone who won't profit from your purchase.