Wondering if the time is right to stop paying the landlord and invest in your own piece of real estate instead? With today’s low interest rates on home mortgages and a housing market that is, on average, still more favorable to buyers than sellers, it is a decision many current renters are currently weighing.
Here are some pros and cons to consider when discussing rent vs. buy within your household.
How certain are you that you will remain in this area for the next five years? How important is it to your long-term financial goals that your home appreciate significantly in value?
If you are in a career where frequent relocation is likely, than you might not see any return on your investment if you purchase a home and then put it on the market a short time later. However, if you have settled into an area, have solid job prospects and – better yet – solid connections should you need new employment in the future, then you can be more confident that you will stay in your home long enough to build equity.
How do you build equity? Essentially, your house is owned by you and your lender. Every year that you pay the lender, you slowly start to increase how much of the home you own and decrease how much of the home the bank owns. Your equity is the difference between what your home is valued at and how much the bank owns.
For purposes of illustration, let’s say you took out a $100,000 mortgage on a home valued at exactly the same amount. The bank owns 100% of the home, or all $100,000. Over time as you pay on the mortgage, the amount the bank owns is now $75,000. That means you have built $25,000 in equity. At the same time, let’s say the value of your home increased, to $125,000. That increase in home value is all yours as well. So, you now have $50,000 in equity!
Depending on your financial circumstances and the area you purchase a home in, you may be able to get a government-sponsored mortgage that does not require any down payment, and helps with closing costs, such as a USDA loan. A fixed-rate mortgage such as this means you will pay the same amount to stay in your home, month after month, year after year. This is very different from renting, where the cost seems to increase every time you sign a new lease.
In addition, there are potential tax savings associated with buying a home. The Internal Revenue Service (IRS) allows homeowners filing annual tax returns to deduct their mortgage interest, property taxes and certain other expenses, including certain closing costs.
The flip side is that home maintenance is ongoing and costs money. You won’t be able to call your landlord when the faucet won’t stop dripping. You’ll either become a handyman yourself or you’ll be contacting your local plumber. Either way, the routine care and maintenance of a home costs money. And, depending on where you purchase, there may be Homeowners Association (HOA) fees to keep in mind as well. This is often the case in townhome or condominium properties, where there are shared common spaces to be maintained.
While there are some home loans available that reduce the amount of down payment that is required to purchase a home, many conventional mortgages will require anywhere from 5% to 30% of the home’s purchase price as a down payment, depending on your specific circumstances. You’ll need to plan and save for this, which can be a daunting task for many.
However, there are options. FHA Loans can be obtained with little money down, and that money can be in the form of a gift from a charitable organization, family member or employer. As mentioned, USDA loans can be obtained with no money down.
One of the smartest steps to take prior to purchasing a home is to get pre-approved for a mortgage. Sellers tend to favor home buyers who either have cash in hand or a pre-approved mortgage in their pocket.
When you contact Maple Tree Funding, an experienced, licensed mortgage broker will work with you to develop your financial profile and focus in on your strengths. We can provide a free credit report, review your scores and help you determine how much you can afford to spend on a home.
We work with dozens of different lenders and can develop mortgage options that are typically not available at many local banks that only have their own lending programs to work with. We even have mortgages available for those with bad credit.
The decision to continue to rent or plan to buy a home can be a daunting one, with no right or wrong answer. Review your financial picture, weigh the pros and cons, and contact Maple Tree Funding to find out how much you can afford to spend on a home.