The choice ultimately comes down to your individual financial decision. Can you afford to buy it? However, that is not the whole story. Many factors play a role when deciding if it is time to take the plunge.
Analyzing the Situation
Cost-Benefit Analysis is the term for figuring out if something is worthwhile doing or not. When you analyze a situation and decide that the benefits are greater than the cost, you may want to go forward. Conversely, if the cost exceeds the benefits, you may decide to wait. Sometimes when you weigh the benefits against the cost, the benefits are higher but not high enough. In that case, you might want to increase the benefits or lower the cost before taking action. These are exactly the thoughts you should be having as you plan to buy your first home.
To help you weigh the benefits and costs of buying vs. renting, this report offers key elements to think through, including evaluating the monthly payments correctly, estimating homeownership costs, weighing location against price, evaluating purpose and home investment strategy, and improving credit and interest rate to decrease payments.
The most important factor when thinking about buying is to not “panic buy.” Don’t jump in just because interest rates might rise or prices might rise. But when you are ready and don’t let the market dictate your timing.
What are the benefits of renting?
• One benefit is living in a property without spending great chunks of money on replacing the roof or fixing the plumbing.
• Another benefit is that you may be able to rent a type of home or rent in a location that you could never afford to buy.
• You have no stress or worry about maintenance. That’s the landlord’s job.
• You can pick up and move without wondering if you can sell your house.• If your income drops, you can rent somewhere less expensive.
• If you are late with a payment, you can discuss it with the landlord.
• You probably won’t get a serious ding on your credit if you’re a month late.
• In many places, renting is the only option because there isn’t enough housing for sale, or the prices are beyond reach for the average mortal.
What are the costs of renting?
The landlord charges you X amount, and as long as you pay that amount, you get to live in that property. The cost is X. But there are other costs.
• By renting, you lose the opportunity to build equity in your home (the money you gain if you sell the property). So when you move, you move with no money in your pocket.
• You lose the opportunity to pay off the house and eventually own it outright.
• You lose the opportunity to put down permanent roots, do what you like with the property, and raise capital by getting a second mortgage or home equity loan.
What are the benefits of owning a home?
• Build equity through rising values and making payments.
• Pay off the home and eventually have the security of owning outright.
• Be able to increase your wealth…by selling and profiting, renting, or getting a home equity line to use the money somewhere else.
• Put down deep roots in the house and community.
• Do what you want to the house…paint it orange and pink if you want (as long as you don’t live in a Planned Community or Condominium).
What are the costs of owning a home?
• Monthly fixed, and variable maintenance costs are higher than renting.
• Paying Interest, principal, taxes, and insurance on your mortgage loan.
• Time involved in maintaining a home that would not be involved when renting.
• In the case of falling home values, it may not be easy to sell when you want to.
• Inability to work with the loan holder when you’re late with a payment.
• Possibly higher monthly payments than would be with renting.
• Possibly not living in the community you want because you can’t afford to buy there.
Compare Costs and Benefits
Here are several questions that will help you decide if it’s time to buy or if you should keep renting.
Let’s look at an example:
• Suppose you feel that you can afford to pay $1,500/ per month in a mortgage payment.
• Add another $200/mo. in utility costs for ownership vs. renting.
• Put aside a little each month to pay for large projects (painting, new roof, new kitchen, etc.). 5% for homes in decent condition—10% or more for homes in poorer condition. That’s $75/month, based on $1,500.
• Now, instead of paying $1,500/mo, you’re really looking at $1,500 + $275 = $1,775.
• You have a choice. If you really are only comfortable paying $1,500/mo, you will need to SUBTRACT $275. So your target monthly payment is more like $1,225. That can mean a difference of $40,000 in your purchase price, so it is important to calculate maintenance costs before buying.
• If you don’t include maintenance costs upfront, then the costs will come from somewhere else after you buy—your vacation budget, your new car budget, etc. You could become what’s known as “house poor,” a term that means you have a house but a lower quality lifestyle.
What Mortgage would you qualify for?
Just because you believe you can afford $1,500/mo, that doesn’t mean the mortgage provider will agree with you. In addition, what you think you can buy with $1,500/mo isn’t necessarily going to buy as much home as you think it will.
Several factors determine what the lender will decide you can pay and allow you to buy.
• Your loan amount is based on your income, debt, and interest rate.
• The interest rate is one factor that can determine the home price you can buy.
• Your interest rate is based on your credit rating—depending on your history of paying your debts, as well as the amount of overall debt you carry.
So, although you feel comfortable paying, say, $1,500/mo, the mortgage lender might disagree. The lender might say that based on your income, debt, and credit score, you really are more comfortable from their perspective paying $1,400/mo.
And that means, instead of getting a mortgage for $239,000, you can only get a mortgage of $219,000.
So work with your mortgage professional. They will walk you through the entire loan application process. Ask us about a verified approval!
Final Words and Conclusion:
Mortgage calculators should be used as guidelines only, as just another data point. Once you’re really serious about buying, the only truly accurate way to know what you can afford and what your payments will be is to go through a full pre-approval process with a mortgage professional.
Just be sure that the estimate you get includes Principle, Interest, Taxes, Insurance, and Private Mortgage Insurance if you put down less than 20%. If you leave out any of these costs, you will be surprised when your mortgage professional shows you a figure lower than you thought.
As a first-time homebuyer, you are swept up in the excitement of buying—the dream of owning. You look at homes online and imagine putting in your own garden, painting the baby’s room, and decorating the way you want.
Find a great Realtor you trust to sit down with you and discuss the ideas presented in this report. Work with a mortgage professional to get accurate figures.
I want you to know that I’m always available to you—or your friends and family—for a home buying consultation. And I want you to know that I’ll spend whatever time you need to answer your questions so you can make an educated decision in your own time.
Contact us below to schedule a consultation, so we can help you achieve your home buying goals.