By Susan Pryor and Elliot Dubin
Everyone has been hearing all the news about the up and downs in the housing market in recent years. Couples that are getting married have to decide whether to rent or buy with the last few years as a backdrop. The good news is that housing prices are still significantly discounted and interest rates are still historically low. But how do you decide if you want to buy or rent?
The first consideration is how long you think you will be in the home. If you expect to be in an area for more than five years, it can make a lot of sense to buy. If not, the costs of selling your home would likely outweigh the benefits of buying a home. When selling a home, you pay your real estate agent around 7 percent of the home price. Additionally, you might pay some closing costs and do some repairs for the buyer of your home.
As with most questions of finance and major choices, the answer is always about what works for your circumstances. Like shopping for a dress, what works for you is the important issue, and everyone is different.
In doing a financial comparison of buying versus renting, remember that there is also an emotional component to consider. Ask yourself, would you enjoy having a home that you could decorate and make your own? Or are you someone who will completely panic if a light fixture breaks and you have to figure out how to get it fixed?
Before beginning your home search, it is best to speak with a professional loan officer. It is never too early to look at your credit and find out if you are qualified to buy a home. A good loan officer will tell you what you need to do to qualify (if you are not ready) and can talk to you about monthly payments and down payments so you have an idea what you are getting into. In the current market, you might be able to buy for less than your monthly rent expense.
Financial Benefits of Owning a Home:
- Traditionally, housing prices have risen at 3 to 5 percent a year. The last five years have been difficult, but the market is quickly recovering and will soon be at a level that is consistent with a 3 percent a year appreciation rate. If you can buy in a market that is not overheated, and you keep your home for a long time, you will likely benefit from appreciation. For example, if you buy a $200,000 home this year, and you get an annual appreciation of 3 percent per year, at the end of seven years the house will have appreciated to approximately $245,000. At that price you could afford to sell the home and still have accumulated significant equity.
- Additionally, you will slowly be paying off the money you borrowed to buy the house. If you buy a $200,000 home with an FHA loan, you will put down 3.5 percent of the purchase price, or $7,000, and finance the other $193,000. If you have a 30-year fixed loan, at the end of seven years you will have reduced the amount you owe by $19,000. If you have a 15-year fixed loan, at the end of seven years you will have reduced the amount you owe by $76,000. So in the first example where you sell your home for $245,000, assuming the 30-year fixed loan, you would have to pay off a loan of $174,000. The net to you at closing would be $71,000 minus the cost to sell the house (around 10 percent or $24,000 in this case), which is approximately $46,000. Remember that you put down $7,000 when you bought your house, so you grew your $7,000 to $46,000 in 7 years. That is a pretty good investment, but you might have had to figure out how to fix that light fixture.
- There are also tax advantages of owning your own home. The interest and taxes you pay on your home are deductible if you file an itemized tax return. All potential homeowners should consult a tax specialist to see how much this can benefit them, because some families could save several hundred dollars a month in income taxes.
- When you buy a home and get a fixed rate mortgage, your monthly payment does not change from year to year like it does when renting an apartment. The amount you bought the house for and the amount that you are paying for interest are fixed the day you buy your home, whereas rent rates are subject to market prices. So if you rent a place today for $1,000 and rent rates go up 3 percent a year, in five years the rent would be $1,194 a month.
When buying a home, you have to do what is best for you and your current or future family. If you plan to stay in your area for more than five years, call a mortgage professional to find out your options. If you decide you want to be a homeowner, move quickly. Housing prices and interest rates are remarkably low, making this a great time to buy.
Susan Pryor is a Branch Manager of Silverton Mortgage Specialists and the Radio Show Host of Real Estate Radio Atlanta on 106.7 FM. She can be contacted at firstname.lastname@example.org or 678-738-0516.
Elliot Dubin is a license loan originator with Silverton Mortgage Specialists. He can be reached at email@example.com or 404-601-4148.