Over the past several decades, the federal government has promoted initiatives to increase homeownership and help more people attain the American dream. However, as beneficial as homeownership can be, it may not be the right choice for everyone.
Homeownership can offer many advantages including tax benefits, financial security, and the pride that comes with taking care of your own place. But is it for you? Here are 10 questions to help you decide whether you are ready to stake your claim on your dream home.
Why would I want to own?
Many financial professionals consider homeownership to be the single best avenue for building wealth. There are tax benefits as well—under current U.S. tax law, you can write off your mortgage interest expense against your income on your primary residence (consult your tax advisor for details). Owning a home also can foster in you a sense of pride and security, knowing that any improvements you make to the property will benefit you rather than your landlord. Homeowners tend to have more freedoms in a property that isn’t controlled by the rules of others, and many people want to know that they are getting more in return for their money than just a place to lay their head at night.
Why would I want to rent?
Despite what the government might say, homeownership is not for everybody. If you don’t have stable employment or you have a job for which you might be transferred in the near future, purchasing a home may not be worth the expense. Additionally, if you have a job for which you find it difficult to prove your income, it may be tough to qualify for a loan. If you have bad credit, are living paycheck to paycheck, or just don’t feel you are ready for the responsibility that comes with homeownership, renting may still be your best option.
Can (should) I afford it?
Just because you can do something doesn’t mean you should, right? The first rule of thumb is: Don’t let anybody push you into making a decision as big as buying a home. Your friends and family might consider buying a home a no-brainer, but this may be one of the biggest decisions of your life, and it is important to make sure that you are coming to sound conclusions on your own. First and foremost, you need to find out if you can afford a home. You need a mortgage consultant who is willing to spend time getting to know you and your long-term goals—communication is the key factor.
Curious prospective homebuyers sometimes turn to Internet-based services to investigate current interest rates. But a faceless website will not take your future financial planning into consideration or guide you through the many nuances of the loan process. A qualified mortgage consultant will be able to ask you the right questions to see how much you can afford.
Can I buy as much home as I can rent?
As rents increase around the country due to increased demand (remember, there were a lot of displaced homeowners due to the financial collapse and increased unemployment rates over the past few years), many people are finding that they can own a home for less than they can rent one. In fact, because of the tax advantages of homeownership, it is possible that you even can buy more home then you currently are renting for essentially the same monthly outlay. For example, a qualified mortgage consultant can show you how, based upon certain parameters, a $1,250 per month mortgage payment can be equivalent to a $1,000 rent payment. And how, with today’s low interest rates, a $1,250 per month mortgage payment might buy you a $225,000 home, which may be a lot more than the worth of the place you’re currently renting. One thing is for certain: you’ll never know unless you ask!
What if I don’t have very good credit?
Your credit score certainly is important, but it does not have to be perfect in order to buy a home. Often, one’s credit score might be good enough to buy a home, but not good enough to rent an apartment down the street. Although the most advantageous programs and lowest rates are available to those with better credit scores (680 and above), many lenders have programs for people with FICO scores in the 500s with good compensating factors. Increasingly, some lenders have come to realize that a person’s ability to repay cannot be determined solely by a number from the credit bureau—these lenders have developed programs targeted at those who exhibit an ability to repay a loan despite a low credit score.
What if I don’t have any money for a down payment?
Although the freewheeling days of “No Money Down!” for everyone are long gone, there are options requiring little or no down payment for those who qualify. For example, the Department of Veterans Affairs (VA) still extends “no money down” programs to veterans of U.S. military service who are qualified borrowers. Likewise, the U.S. Department of Agriculture (USDA) offers $0 down payment options for those looking to purchase outside of populated areas.
Many states, counties, cities, and municipalities have programs designed for low- to moderate-income buyers that require a minimal down payment, all in hopes of increasing commitment to the communities in which these buyers settle. These entities believe wholeheartedly that encouraging homeownership can add new life and stability to areas that have been neglected.
What’s going on around me?
Be sure to look at all of the factors that feed into the housing and rental markets in your community. It is important to research what the market is doing. Is demand for housing increasing or decreasing? Are prices increasing or decreasing? How about rental rates? Are employers moving in or out of the area? What types of jobs are available? What is the overall economic outlook for the area? If you are in an area of increasing popularity that is seeing significant growth and high demand, know that rental rates are probably increasing just as quickly (if not more) than housing prices.
Do I have to decide now?
Of course not. However, if after asking yourself all the questions presented above, you have decided that it makes more sense for you to buy a home and pay your own mortgage rather than someone else’s, there is no better time than the present to get the ball rolling—because there can be a cost to waiting. In simple terms, every 1 percent increase in home loan rates decreases the buying power of an individual by 10 percent in home price. This means that if you qualify for a home priced at $200,000 today and interest rates increase 1 percent, the amount you could qualify for would be reduced to approximately $180,000 to maintain the same payment.
Do I really want to do this?
When it comes right down to it, homeownership is about responsibility. When you own a home (as opposed to renting someone else’s), you are responsible for the upkeep and homeowners’ insurance, as well as paying the property taxes, utility payments—and most importantly—the mortgage. The consequences for not fulfilling these responsibilities can be quite a bit more severe to the homeowner than to the renter. After all, it is one thing to be evicted from your apartment, and another thing entirely to be foreclosed upon or saddled with property-tax liens. However, for the responsible homeowner, the benefits can (and usually do) outweigh the risks.
OK … I have decided to buy. What’s next?
As mentioned previously, you likely will find the services of a qualified mortgage professional invaluable. Where do you find one? Ask a friend or family member who already has purchased a home if he or she can recommend someone. You can always try your local bank or credit union, but it’s hard to beat a referral from someone you trust. If you do not know your credit score or how much you can afford based upon your income and debts, a mortgage professional can provide an in-depth analysis of your personal situation and help develop a strategy to get you into a new home.
Once you are preapproved for a loan, have your mortgage professional recommend the right realtor based upon where you are looking to move and overall personality fit. Your realtor not only is your guide, but also your advocate; it is important that he or she is aware of your goals.
Ultimately, deciding to rent or buy a home comes down to personal preference. There is no right or wrong answer. However, by going through the questions listed above and consulting with your tax professional, financial services professional, and others you trust, you should be able to make a sound financial decision that will help you sleep well at night—regardless of whether it is under your own roof or your landlord’s.