One key aspect of the American Dream is home ownership—it doesn’t just mean having a place of your own, but also building equity, building wealth and maybe even having something to pass on to your children. But buying doesn’t always make financial sense.
Here, three experts help determine which factors to think about as you decide whether to rent or buy.
Let a realtor, home inspector and mortgage officer help
Mary LaViolette-Ange, a realtor and certified distressed property expert with RE/MAX Allegiance, Alexandria, VA, outlines the pros and cons of renting and buying, and suggests that choosing the right advisors is the key to finding a home you can both love and afford.
“Renters pay out about one-third of their income with nothing to show for it later. Renting may seem easy: no taxes, condo fees or homeowners’ association fee to pay, some utilities included in rent, no or little property maintenance to be done. But when the landlord decides to raise the rent, to sell or to move back in, renters ponder the long-term.
“Buying would mean no need to move when least convenient, being able to decorate and update to our taste, putting down roots in the community, staying in the same school district, and investing that money with the incremental increases in equity paying off the mortgage before retirement.
“A trusted realtor, perhaps one met at a neighborhood open house, can help determine the type of housing to focus on so you do not over-buy, based on factors such as future earning power, employment considerations, family configuration, the local real estate market, how many years you plan to own before upsizing or downsizing, whether a condo or townhouse with a higher monthly condo fee but less maintenance is preferable to a townhouse or detached home with a smaller HOA fee. A home inspector will be able to estimate the cost of future maintenance and a home warranty will help even out the payment of large repair bills. A mortgage officer can determine which loan programs would be a good fit for the available amount of down payment (0, 3%, 10%, 20%) saved and/or gifted from relatives and what would be the monthly payment.”
Assess your current financial situation
John Damiano, an associate real estate broker with KellerWilliams in Atlanta, Georgia, outlines the key questions you need to ask yourself before you consider buying.
“When making a decision as to renting versus buying a home you should consider your current financial situation. The first question to consider is, “What are the benefits to pay money toward rent each month without any return?” If your answer is, “I don’t know”, then you should consider talking with your financial advisor and see what your tax bracket is and how much money can you could save in income taxes by buying a home. If the answer is substantial then you should consider that making that purchase is to your benefit.
“The other question to ponder is, ‘How much money is needed to buy a home?’ If you don’t have the down payment and the closing costs associated with closing on a home, then you might consider renting a better option until you have enough money to purchase. Truly the decision on purchasing versus renting is based on each individual’s current financial situation and what are the benefits to buying or renting in their current situation.”
How long are you staying? How much do you have? How much will you make?
Don Frutchey, a senior loan officer with Atlantic Coast Mortgage, LLC, McLean, Virginia, considers additional practical questions that go beyond just your immediate financials.
“I suggest that prospective clients considering whether to rent or buy look at several factors to determine which direction to go. First, how long would they likely spend at that location? This is critical, as it will take time to break even on the costs associated with a purchase.
“Also, consider the monthly payment as, although tax deductions reduce the net cost of ownership, the monthly mortgage payment still needs to be made and in their comfort zone. Additionally, would spending the same on rent put the client in a more desirable home—whether the home is the right size, school district, or general neighborhood? Or could they be in the home they want with a purchase considering their credit and financial state?
“And lastly, one of the biggest considerations for home ownership is the ability to increase, over time, household net worth. Comparing a home valued at $400,000 and a rental payment for a similar home of $2,100 (real world examples in this area), back of the envelope calculations put the increase in net worth of nearly $80,000 in the first five years. This includes an assumed appreciation of 3% annually as well as an accumulation of monthly savings between the mortgage (net after taxes) and a rental payment.”
Doing the Math is a series where we ask three experts to weigh in on common financial decisions.
