TURNING OVER A NEW LEAF - Pt. 4 of 5
Home ownership is an integral part of the “American Dream”. For many, however, it simply is not feasible.
With family obligations, student loans, and minimal wages the up front investment required for home ownership can be too great a task for some. Fortunately, in recent decades, the number of programs aimed at helping people realize this dream has grown exponentially. Purchasing, however, is still a home is a huge financial commitment. It is also an investment that can yield returns in the tens of thousands if handled properly.
Owning a home can also have a lasting positive impact on credit scores when the terms are consistently honored. Though the benefits may be broad there are a host of responsibilities and even some drawbacks that also come along with owning a home. For many people, renting just makes better sense. Let’s compare the two options and decide if you should be renting or buying your home.
The idea that renting is a lesser option than buying is quite common. Many feel that renting is equivalent to “throwing away money”. However, there are a number of scenarios that make renting a better decision, financially and otherwise. A common misconception is that one can simply compare monthly rent with a potential monthly mortgage amount that would be paid as an owner to determine if homeownership is the best option. Unfortunately, deciding between buying and renting is a lot more involved. A host of factors come into play such as how long you plan to live in the home, how much the value of the home can reasonably be expected to increase (this is also known as appreciation), what tax break would you become eligible for as an owner, what fees you will have to pay when you finally make the purchase, and your current credit situation, which will have a large impact on your financing options.
When renting may be better…
As a general rule, the upfront cost of purchasing a home (also known as closing costs) are normally absorbed within the first five or so years. After five years have passed the value of the home will typically have appreciated enough to cover what the owner paid to close the deal. At this point it may be possible to sell the home without incurring any significant losses. What this translates to is a five year minimum commitment to the purchased property. For adults in their twenties and thirties mobility and options are common priorities. This crowd may be better suited for renting and leasing.
If you are currently enjoying an amazing deal on a rental property it may be in your best interest, financially, to stay where you are. Controlled rent, where the rent is charged at a fixed amount and can only be increased at certain pre-set increments, is a prime example of the type of deal that would make renting a smarter option than buying. The money saved on rent can be used to pay off other debts, therefore improving your credit in preparation for home ownership in the future. Or, your extra cash could be used to take advantage of investment opportunities elsewhere.
Significant tax breaks are another thing most people assume every homeowner enjoys. We all know what happens when we ass-u-m-e. In this case, it is never safe to assume that buying a home will come with significant tax breaks. The federal government does allow homeowners to deduct the cost of the interest paid on their mortgage from their taxable income. This is a great benefit if you own an expensive home with a steep interest rate. However, on a low-priced home, the tax break may not be quite enough to consider it an incentive to give up your rental and buy.
If, after considering the points above, you still feel yourself leaning towards the “Ready to Buy” category, here are a few more items to factor in. The first is, how much home can you comfortably afford, or how big a mortgage can you obtain? A mortgage is a loan that is granted for the specific expressed purpose of purchasing a home. It is considered a “secured” loan because if you default for any reason, the lender can claim the property. Primary factors that determine your mortgage amount include your credit report, your ability to come up with a down payment, your income, your debt, and your job history.
In addition to the mortgage itself there are a host of other financial responsibilities and obligations associated with owning a home that a newbie may find financially strenuous. Your mortgage payment will consist of two parts, principal and interest. The principal is the amount you borrowed from the lender and the interest is the fee they charge for furnishing the loan. However, this is just the beginning. You will also need to be prepared to pay property taxes to your town, city, or country, insurance to protect your new investment, as well as HomeOwners Association (HOA) or some other type of Condominium and Cooperative (co-op) fees which are very common.
Considering all the details, the dream of owning a home can seem more like a nightmare if you haven’t taken the proper measures to prepare yourself and your finances. If you stay ready, you won’t have to get ready. Establishing and maintaining healthy credit is the best way to align yourself to achieve the goal of owning your own home, whenever you are ready!