Buying Versus Renting

Mike Capelle, Broker/OwnerMike Capelle, Broker/Owner

Renters today face the highest monthly charges in history and costs just keep rising month after month. In fact, U.S. renters pay an average of 30 percent of their monthly income on rents while homeowners pay just 15 percent on mortgages. The steep cost of rent makes buying appealing, but many renters don’t have enough disposable income after their rent charges to save for a down payment. So what are renters to do when faced with the choice to keep paying astronomical rents or stretch finances to buy? When does buying versus renting make sense?

Are you ready emotionally to own?

Is owning a home of your own a goal that you are dedicated to achieving? You must not only have the desire, but also the drive to save a down payment, and the time and energy to spend looking for the right home and working through the process to purchase it. You also must be prepared to start caring for/working on your own home—repairs and maintenance will be your responsibility for a home you own. Your spending habits must be disciplined enough to make mortgage payments and plan for additional expected costs.

The more you save the more house you can buy; or the larger the down payment and consequently the smaller the monthly mortgage would be. Get yourself on a budget so you know where your money is going each month. Then, take a look at what you’re spending and look for ways to cut back. $10 to $50 here and there can add up to toward a down payment.

Are you ready financially?

First, you need a stable income to qualify for a loan. Then, your debt to income ratio must be low, so pay down unnecessary debt. Check your credit report and clean up any negatives (free from annualcreditreport.com). Ensure that you are doing everything possible to maintain the best credit score.

Know that the cost of home ownership is more than a down payment and mortgage; there are insurance, tax, and maintenance costs. The standard percentage used by lenders is no more than 28 percent of your gross income should apply toward principle, interest, taxes and insurance; this is a guideline, and most individuals should keep it to 25 percent or less. A good way to figure out how much house you can afford is to build a budget that includes your fixed expenses; anticipated future expenses such as a new car, vacations and child care expenses; and what you spend each month on extra things that the bank doesn’t take into consideration like dining out, pets, shopping or entertainment. You want to be able to live a comfortable lifestyle without having to sacrifice due to a burdensome mortgage.

When is it financially beneficial to rent instead of buy?

There is nothing wrong with renting. Only once you’re ready to settle down, should you consider buying. And then you must make sure you can actually afford a house that fits your desires.

If you’re looking at just the financials, there are only a couple of situations where it’s better to rent instead of buy. The first situation is when you only plan on living in one location for a couple of years. Due to closing costs and other costs associated in buying a house, it can take a few years for buying to get ahead of the rent. The other situation would be in a location where the housing market is really overpriced. Yes, rent rates will be high too, but you might be better off in the long term waiting for the market to correct, or considering more affordable areas, and purchasing a house for a lower price.

When rent is just as much as buying, you need to take a look at the options, assuming you feel you have job stability to keep you in one place for at least 5 to 7 years, which is the national average time a first-time buyer owns their first home.

How to get started

The place to start is with the experts—a Realtor and a lender.

Talk to lenders to find out what loan programs might be available to you, what down payment would be required, and what you can afford. Buying a home with less than a 20 percent down payment will most likely trigger the lender to require private mortgage insurance, which can cost an additional 1 percent of the entire loan balance each year.

Decide what features in a home are “must haves” and which are “wish fors.” Talk to a Realtor to discuss your goals and budget, and for advice on how to go about purchasing a home. It may take time to find a home that meets your needs, and know that you will probably not get everything you wish for. Depending on the state of the local real estate market, you may need to act quickly when you find “the one.” Be sure in working with your Realtor that appropriate inspections are called for in your purchase contract.

When it’s time to pursue home ownership, Sunset Vista Realty is ready to help. Check out our Buyer Services.

— Inspiration: Zillow Blog

Leave a Comment

*