To Buy or Not to Buy? A Four-Part Series

Renters have a huge advantage in this market. They have nothing to sell, which means they have nothing to lose. In other words, they do not have to take a hit on an existing property in order to purchase another one. As we all know, this is a down market. Houses are affordable and interest rates are still at a historic low. I know you have all heard this over and over again like some REALTOR® mantra, but let us take a look at a concrete example, just to put things into perspective.

Rent vs. Own Comparison

If we have a renter who is paying $1,200 per month and the landlord increases the rent 5% per year, the total rent paid over five years is $79,567.

On the other hand, if this renter purchases a $200,000 home using FHA financing with a 3.5% down payment, the loan amount would be $193,000. The monthly payment at a fixed rate of 5% including FHA’s required Mortgage Insurance would be $1,221. The total monthly payment (principle, interest, property taxes and hazard insurance) would be $1,471. Five years of mortgage payments would total $88,260, which is $8,693 more than renting.

At first glance, it might make more sense to rent a home. “I can save $8,693 over five years,” you might think. But what we haven’t yet considered are the additional potential financial benefits of home ownership.

Financial Benefits of Home Ownership

All pointers are indicating that this is a down market. If you were investing in the stock market, wouldn’t you want to buy low? If your stock broker called and said “X stock is at a record low, buy NOW,” would you be inclined to do so? The market is at a low point and even though it may stay low for a little longer, home ownership, like investing in the stock market, is a long-term investment.

So if you are in it for the long term, you will be paying principle and interest over several years. By paying principle, you are building equity in your property, which is that nice buffer that allows you some extra cash when you sell, which can be used toward a down payment on an even larger property. By paying interest, you are most likely provided a tax shelter, which will benefit you financially when filing your tax return. Also, over the long term – and especially when buying in a down market – your property is likely to appreciate, giving you even more equity in your home. And don’t forget that down payment that you may have paid. Whether it is 3.5% or 20%, that is adding to your equity, too. And what about ‘sweat equity’? The improvements you make – if done right – will add value to your property as well.

In summary, if you rent over five years, your nearly $80,000 is gone, although you have had a place to live.

If you buy, then over five years (or however long you stay put) you are paying into what some call a forced savings account and, in the end – if you haven’t touched that equity in the meantime – when you finally sell, you will have some cash to show for it AND you have had your very own place to live.

Other Advantages of Home Ownership 

1)      Your payment is fixed (if that is the type of loan you have) and no landlord can ever ask you for more. Property taxes and hazard insurance premiums may oscillate, but your principle and interest will never be increased.

2)      You can do whatever you want with your own home – decorate it the way you want, have the pets that you want, have the style of home that you want, have a yard if you want and choose your neighborhood.

3)      You have a sense of place, a sense of community that you may or may not have if you are renting, and pride of ownership.

Some Disadvantages of Home Ownership 

1)      A down payment – usually 0%, 3.5% or 20%, depending on the type of loan – and good to excellent credit are generally required. (There are still down payment assistant programs available for those who qualify, however.)

2)      Preventative home maintenance – it’s important to stay on top of little things like changing the furnace filter, caulking, and making sure the bathroom fans work properly to prevent moisture build-up and mold. You may have yard maintenance as well. You can’t just call the landlord anymore. It is important to have the funds and the desire to do these things or have them done.

3)      Unexpected home maintenance – if that roof leaks, it may need replacing, which could be a check in the amount of $5,000 to $10,000 or more. A good home inspection can help you determine condition and life expectancy of certain items, but it is important to have an emergency fund for big ticket surprises as well.

4)      If you buy high (in a seller’s market, for example), the market value of your home can actually go down and you can lose all that equity I was telling you about – but you have still had a place to live…

What’s the First Step?

So as a renter, if you decide you do want to pursue home ownership, what is your FIRST STEP? Talk to a mortgage professional. He or she can let you know if you qualify for a loan and, if so, for how much. If you don’t qualify, he or she can set you on a path to save for a down payment or improve your credit score.

Once you qualify and have your price range established, select a REALTOR® whom you trust and have your own representation – your own advocate. Remember, a real estate professional is not just there to unlock the doors to those homes you want to see – he or she is there to advocate for you, negotiate for you, recommend his or her top service people to you and help walk you through entire process with as little stress and as few hiccups as possible. It’s a long-term relationship, so choose wisely.

Happy house hunting!

Stay tuned for...

Part II : Buying and Selling for Move-Up Buyers

Part III: Buying and Selling for Downsizers

Part IV: Buying and Selling for Investors