Buying a house can be a life-changing experience. Each step along the home ownership journey requires either a good deal of time or money:
- The time to select and meet with a mortgage lender and gather the necessary information to determine the borrower’s qualification for a home mortgage;
- The time to collect, in addition to, the funds necessary to make the down payment associated with the mortgage – typically a percentage of the agreed upon sales price;
- Funds availability to pay for any mortgage insurance premiums – typically calculated form .5% to 1.0% of the mortgage loan amount if the borrower has less than a 20% ownership interest in the value of the purchased home;
- Funds availability to pay the insurance premiums to protect the home (and the mortgage holder) from the possible ravages of weather, fire and accidents;
- After the home is purchased, even a new home, the funds needed to perform and complete ongoing maintenance and repairs as well as to purchase the equipment and/or labor to complete lawn work and landscaping on a monthly basis.
- Further, whether to replace the freezer light bulb or to recover a chair in the latest furniture fabrics, every day a home can seemingly find reasons for the homeowner to spend more money including items like homeowners’ association dues, trash pickup and other utilities.
Weighty funding and time commitments associated with a home purchase may not be realistic for the faint of heart – or a person inexperienced with the home buying process. Homeowners should realistically expect potentially thousands of dollars will be spent on acquiring and maintaining a home. To add more stress to the buy vs. rent decision, consider a home is often an American consumer’s single largest investment made during their lifetime. Why is that relevant? Homeownership, or the lack thereof, can dramatically impact when a consumer may retire as well as the quality of life during retirement.
If you’re looking for fewer strings attached to your time in addition to less financial responsibility, consider renting. Well, that’s the simple answer. When you actually sit down to decide between renting and buying, below are some additional key pieces of information to help in making an informed decision about buying or renting.
Carefree & Flexible
Renting is convenient for the consumer who likes to change up their living arrangements regularly or who enjoys trying out different housing options and/or geography: first the beachfront followed by a place in the mountains then into the city and a downtown loft… or for a consumer whose income is unstable (i.e. freelance, temping or working for a company that may not be doing well). With renting, you aren’t locked into a multi-year, long-term investment, so there’s freedom to move without hindrance, as long as it is within the confines of the rental contract. You also don’t have to worry about most repairs associated with normal wear and tear and normal usage, homeowners’ insurance or property taxes with rental property.
A Touch of Class
Another renting advantage is the ability to bunk in sweet digs without paying the high costs often associated with a new house. Newer rental complexes with fresh-out-of-the-box appliances and modern styling may be available. Other great rental amenities may include access to a gym, swimming pool, free cable and some rentals may include all or some utilities in the one monthly rent payment.
Prepping for the Future
Living in your childhood bedroom or bunking with strangers in a dorm can get old quick, but buying a house might not be in the budget. Renting provides a place to live and time to get financially prepared before purchasing a home. For example, lenders usually want no more than 28% of gross monthly income to be used to pay the mortgage, homeowners insurance, and property tax, and like to see consumers utilizing no more than 36% of gross monthly income on total debt including the above items. Taking on debt without the income to support it is unwise, even if you “qualify” for a loan.
The true cost of owning a house will usually be more than just the mortgage payment when expenses such as property taxes, maintenance, utilities, and homeowner’s insurance are added in to the total cost of homeownership. A down payment as low as 3% for 30-year mortgages is available – otherwise down payments of 20% are recommended to avoid having to pay mortgage insurance or higher interest rates. You will also need several thousand dollars to close the purchase. Another helpful tip is to visit with a lender and become prequalified for a mortgage – in essence the maximum amount the lender will let you take on as debt to acquire a home. During the prequalification process, the lender and you should discuss the additional costs that may be incurred to purchase a future home. Finally, be ready to begin home shopping if “yes” is your answer to the following homebuyer knowledge helpful tips:
- Understand and have determined the true costs of homeownership;
- Have visited with a lender and become prequalified for a mortgage up to a certain home value;
- Have money readily available for the down payment and closing costs;
- Determined a reasonable time estimate of home ownership;
- Can afford to be responsible for routine home repairs/maintenance; and,
- Have reviewed and validated financial, career and family goals.
Renting, in many cases, means paying someone else’s mortgage. Your rental payment, ultimately to the mortgage holder, allows the mortgage holder to build equity (ownership value – calculated as the difference in the mortgage and other debt associated with the property and the fair market value of the property) and move ever closer to owning the property outright. By purchasing a home, the home buyer is reducing the total liability held against the property by the lender and gradually building equity – if the value of the house remains the same or increases. The downside, as the last few years have shown, real estate prices can decline, reducing a home’s value and making it worth less than the amount originally paid.
Want to Invest?
A house can be a great investment if you want to live in it for more than a few years, but don’t rely on it being a guaranteed good investment that provides a return. A short-term investment in a house (usually considered to be two years or less) is a bad idea, because the expenses of buying and selling the home may wipe out any potential profit – especially if the housing market plateaus or falls. However, once the house is paid off, monthly expenses will be significantly reduced.
Investing in a house can have benefits before the mortgage is paid off. The portion of the house you have paid down is a financial asset (it has economic value) and can be used to offset liabilities (debts). This means that homeowners can take out a home-equity loan (a second mortgage) and use it to finance other purchases even those unrelated to the home itself. It’s not always a good move, but it can create cash flow if and when needed.
If you’re on the fence about buying a house, check into DuTrac’s mortgage options. DuTrac’s real estate lending team is ready to work with you to open each door to home ownership.
Brass Magazine Summer 2010