Rent Vs. Own?
Did you know that a home owners net worth is 33 times greater than that of a non-homeowner? If you think about that for a second, it really is an astounding fact and one that greatly favors buyers. We know that the decision to stop renting is not always an easy one, there are both lifestyle and financial decisions to consider with both scenarios.
Being in the mortgage business we might be a bit biased toward purchasing, but according to our recent survey of national home buyers, _____% said that they were interested in buying their own home. This is a significant change from just a few years ago (after the housing crisis) when renting was the more attractive option.
If you find yourself in this scenario, there are several key questions to consider that can help guide your decision. Also, there are numerous misconceptions that should be examined as you might actually be able to purchase a home and not even realize it.
7 Questions To Consider:
- How long do you plan to live in the city in which you are looking to buy? The length of time you plan to spend in a home is a big factor in deciding whether to rent or buy. While none of us have a crystal ball, if you like the city you live in and your current job situation is favorable then you might consider owning. Depending on the market, 3-5 years in a home is a manageable length of time to appreciate and not take a loss.
- How much do you currently pay in rent? People often think if their rent is the same as their potential mortgage payment they should consider buying a home. In assessing a home purchase, it is helpful to consider uncommon and unplanned costs. For example, mortgage insurance and taxes are often not factored in by first time home buyers. If you have never purchased a home you might not know to include these. Other unplanned costs are things such as lawn care, utility bills, daily home maintenance and long-term maintenance that for a renter are done by the landlord.
- What is your annual income and how much debt do you currently have? Often when people are dreaming about their new home they get caught up in the excitement and might overlook not only the unplanned expenses but the impact of already accumulated debt. A good rule of thumb is you want your mortgage payment (including taxes, insurance, and association fees) to be 25% or less of your annual income. Your total debt (mortgage + other debt) should be 40% or less of your income.
- How much savings do you have as a cushion? While not a necessity, one factor to consider is having a savings cushion not only for a down payment but for unplanned expenses.
- Do you have pets? If you have pets you might find it more difficult to rent a space that fits your needs. Additionally, pet deposits can quickly add up so this could be a consideration for buying as that money could be spent on the home or the down payment instead of paid to your landlord.
- Do you have children? If you are starting a family, or have children, owning a home can often be the best route for a variety of reasons. Once again, making an assessment about the mortgage payment, unplanned expenses and your overall financial situation are critical in this situation.
- Are you a veteran? If you are a veteran, there are numerous loan options that could be available to you that are often low money down, easy to qualify and reasonable interest rates.
Plug in some numbers and explore your borrowing power. Estimate monthly payments, evaluate interest rates, and compare loans against each other with this simple tool.
3 Common Misconceptions
- You need a lot of cash to buy a home. These days there are several loan products that do not require a 20% down payment. Depending on your situation, you could potentially have a downpayment as low as 3-5%. It is important to consider closing costs and real estate fees when looking at overall cost to close a loan.
- You can’t afford the monthly payments. The good news about a monthly payment is in most geographic areas you have a variety of homes priced in ranges that could make homeownership possible for you. You might have to be flexible regarding location but if homeownership meets your needs then it is possible to pick a monthly payment that works for you (don’t forget unplanned expenses as a factor) in your geographic area. Often people start looking at homes prior to determining what they can afford. If you start with what you can afford and find locations based on that it makes the process much easier.
- You picked the wrong time to purchase based on the current market. This is one of the biggest misconceptions we encounter. Currently, we are in one of the best time periods in history for homeownership - rates are still low and in many parts of the country cities are growing and prices are manageable.
4 Advantages of Home Ownership
Now that we have explored the questions to consider and common misconceptions, let’s review the advantages of each. Home ownership has four primary advantages:
- Homeownership can help build wealth through equity. If you have difficulty saving for long term expenses (college, retirement, etc.), think of owning your home as a long term savings plan. Yes, you still have to pay for interest on your loan, but over time you are actually putting your money into an investment vehicle. You are building valuable equity in your home that will add to your net worth over time. Remember, Every month that you make a mortgage payment, is another month that you’re paying down what you owe on your home. Not only does that decrease the amount that you owe over time, but it also increases the amount of equity (or value) that you have in your home.
- Tax Benefits of Home Ownership. When you own a home, the tax code usually allows homeowners to deduct their mortgage interest from their tax obligations. For many people this is a huge deduction, since interest payments can be the largest component of your mortgage payment (especially in the early years of owning a home.)
- Predictable Payments. One of the advantages of owning your own home is that you will typically have more stable monthly mortgage payments year over year. Landlords often increase rent with every lease renewal. While there may be some variation based on taxes or your loan product, it's traditionally more stable than renting.
- Lifestyle. Homeownership gives privacy and the ability to make your space your own. Creating your own home environment can also be a source of pride and accomplishment. Depending on your circumstances, the value of creating your own lifestyle can be priceless.
3 Advantages of Renting
Renting has three primary advantages:
- Short-term commitment. One of the advantages of renting is the flexibility and the the ability to make a short term, limited, commitment. Most leases are for 12 months so if your job or lifestyle requires you to relocate you have options.
- Low Maintenance. Every home is bound to have a maintenance issue or two during your tenure. The nice thing about renting is the burden of repairing and maintaining the property is limited. Additionally, the costs associated with maintenance are not your financial responsibility.
- No/Low Down-Payment. Unlike purchasing a home, renting usually requires less money upfront. While there are numerous low down payment programs for purchasing a home, is most circumstances the dollar amount required to obtain a rental is less than if you were to purchase. Typically, a rental will require a refundable security deposit, a refundable pet deposit and the first month’s rent in advance.
While owning a home has numerous benefits and is often considered the American dream, preparation and readiness are an important part of the equation. After pondering the questions and considering the advantages of owning versus renting you could decide that renting is better in the short-term. If that is the case, you can begin to plan for the future and owning a home. It is never too early in the process to find an expert mortgage banker who can help you through the process of preparing to own while you rent.