By Michele Karl
Living in a post-housing collapse means that people are more frightened today than they have been in the past, and rightfully so. There were many causes to the recession, but the ultimate result is that both banks and possible buyers are more skeptical about home buying. So, the main question today is: should you rent or buy your house?
I’d also like to point out that this article is specifically meant to address the issue for those wishing to buy a house as their primary residence. Buying a home as an investment takes many different considerations that will be addressed in a different blog post, so stay tuned!
First, let’s start with the major benefits to help you decide if you should rent or buy.
Once you pay off your home, you’ll have a great asset and it is yours – no more monthly payments! If you rent, though, the payments will never stop.
It is often possible to buy a home more cheaply, month-to-month, than renting one because of the types of loans offered.
If you home appreciates in value, you could earn a return on your investment or, at least, break even. This is something that can’t be said for renting.
There are tax credits that can be given in the event of home ownership.
You don’t have to invest your money in repairs, maintenance, or property taxes. Additionally, your utilities are sometimes covered as well.
Depending on many factors, you could pay very large, seemingly never-ending, amounts of interest on buying a house that you don’t have to worry about when renting.
You have more freedom to move, but also have to deal with possible rent hikes.
Contrary to popular belief, homes do not typically appreciate in value more than keeping up with inflation.
So, now, let’s go a little more in-depth on each of the most important points.
There are quite a few factors that go into this one that make it complicated to generalize. Also, this is more than just recognizing if your loan payment will be more or less than your rent payment.
Your first step in determining if you should buy or rent is understanding what kind of loan you can get. I know some great lenders I’d be happy to recommend if you’re living in east Tennessee.
Determining the loan takes into account your credit score, assets, liabilities, and amount you can have for a down payment. Then, you’ll determine how many years the loan will last, based both on what you can afford and preference, and lastly, your interest rate.
After you’ve understood how much you will be paying each month towards your loan, it’s time to figure out the taxes you will own on your home. Then, it’s a smart idea to set aside a certain amount for the unexpected repair you might have to make.
Adding up all these costs, also including utilities, homeowners insurance, and taxes, and dividing them by 12, you can then add that to your monthly loan to determine the total amount you will need to pay monthly.
One great tool to help you understand if you should rent or buy, after knowing all of these costs, is from the New York Times (http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html). Just enter each of the numbers, as well as how long you are going to own the home, and it tells you in simple terms if it would be smarter to rent or buy a home.
This calculator also attempts to adjust the cost for home price growth rate, rent growth rate, investment return rate, and the inflation rate you can likely expect in the future.
Another thing to keep in mind, though, is that even if you determine that the payment for buying a home will be slightly more than renting one, rent payments will never end, whereas paying off a home will mean you never have to worry about those pesky payments again.
Of course, even after your house is paid off, you will still have to pay taxes, repairs, and more that you won’t have to consider with a rental, but these will be exponentially less than regular rental payments.
Another question many people don’t know to ask is about appreciation. Will your home actually appreciate in value?
So, it seems that the consensus among experts today is that buying a home (to live in) is not actually a great investment, at least sometimes. Studies have shown that the increase of housing value just barely outpace that of inflation.
Don’t think that means it’s a bad idea; it could be the best buy for you or your family! Yet, it also means that you should not attempt to stretch your finances to buy a house hoping for a large return. Staying within your determined budget, though, is the way to go.
The best idea when thinking about your future home is to consider that it is a purchase, not an investment. If you can work the numbers out and it’s affordable, you’re saving yourself from rent hikes, an owner that decided to sell the home you’re renting, never-ending rent payments, no control over your own home, and more.
Yes, you will end up paying a very large amount in interest, but that’s unavoidable for most families and doesn’t mean that it couldn’t still be the smartest decision.
Buying a home is a huge, exciting purchase and you need to understand the finances involved before you make the leap. The answer is different for everyone, but the main factors you should look at are:
How long will you be living in the home? The longer you plan to stay, the smarter it becomes to buy instead of rent.
How much money can you put down? If you can afford to place a large percentage down, it’s probably smarter to buy than rent. If you can’t, that could still be okay because…
How good is your credit? If you can’t put much money down but have great credit, you can still end out on top with low, fixed interest rates if you have a high credit score.
With the types of loans offered today, there are many scenarios where your best decision is to buy your house. The smartest advice I can give you is to understand your payments, decide how long you’re planning to stay in the house, then plug the numbers into the calculator.
If you need assistance with finding a lender, understanding home costs in your area, or finding a house after you’ve made your decision, Priority Real Estate is here to help. Just go to www.MicheleKarl.com or call me at my office at 865-577-6600.