A Guide to Homeownership
A Prospective Buyers' Guide to the Costs and Benefits of Homeownership
Tips for making the big decision
As a prospective homeowner, you should ask yourself many questions about your current situation and about where you see yourself in the coming years. Here are just a few:
- How long will I stay in this area?
Maybe you only plan to stay in your home for a year or two because you expect your employment or other needs to change in the foreseeable future. In that case, renting is probably your best option. Your transition to a new location can be simpler as a renter. And, if you live in a fluctuating market, the upfront costs involved in purchasing a home can make it hard to earn a profit or break even if you think you may move soon.
However, if prices in your local housing market are trending upward, and you're willing to take a risk, you may still make a profit even if you own the home for a short time. It's not a very secure choice, though. If the market takes a downturn, you could lose your investment.
If you know you will certainly be moving in a year or two, rent and wait until you can stay in the home for a while. With less monthly cash outlay, this additional time as a renter gives you a chance to save, which means you can have a larger down payment in the bank when your dream house comes along.
- What are the interest rates now?
Interest rates can vary quite a bit. So it's good to take a close look at where they are right now, and consider what the experts have to say about where they may be headed. If rates are high, you might want to rent and wait for them to come down. Of course, loan rates are just one factor. You should weigh it against the trends of the real estate market. If you feel your property will appreciate over the next few years, it might be worth your while to get a mortgage loan.
If the rates are low, locking in a low interest rate is a good plan. An attractive rate means a lower monthly payment. If most of the other factors measure up, it may be the ideal time to purchase.
- Is this a declining real estate market or are properties appreciating?
Good question. There is no simple answer (oh, for that crystal ball!), and every housing market is different. If property values are going up in your area and the experts say it will continue to rise, it would be a good time to purchase. See the example in the section. See “Advantages And Disadvantages Of Renting And Of Owning,” above, for an explanation of leveraging and how that can help you.
In addition, if the real estate market is going up, it is usually easier to get a mortgage because lenders tend to be more flexible. They often assume the property will continue to improve in value, so they have a measure of protection. If you default on your loan and they foreclose, they reap the benefits of the improved property value.
If the property values are heading down, however, now is probably not the best time to buy unless you are getting a really good deal on the price.
The exception to this would be if you plan to live in the home for many years. In this case, it doesn’t matter if the value goes up or down in the short term, because you will not be selling for a long time. Historically, home values recover after a low period in the market and the current overall trend is upward.
- Can I afford to pay more each month?
You must look at your budget and calculate what you can afford each month, taking into account all the known and unexpected expenses that can come with owning a home. If you can afford the monthly payments, and have enough left over to cover maintenance and repair costs, buying is usually the better option. If you can’t, renting is typically a safer bet.
- Do I want the added responsibility?
When you accept the key to a new home, you accept many new responsibilities. When you rent, apart from the monthly check to the landlord and paying some utilities, you can expect someone else to pay for repairs and maintenance. They need to do the work and spend the money. When you purchase a home, you either fix the problems or you live with them.
- Do I mind doing maintenance or do I like having someone else handle all of that?
When you own a home you will need to roll up your sleeves and do some work to maintain the property. You can hire people to do many things, but still there will be areas you will want to take care of yourself. If the thought of doing maintenance overwhelms you, renting might be the best option for you.
- Do I have money in the bank for closing costs and down payment?
It's pretty simple. Without money in the bank for the upfront costs, you cannot purchase a home. If you have the money for these costs, you must also make sure that you are not robbing yourself of your last dime. Always keep a reserve on hand. Most lenders will require it.
- How well do I know my credit score?
Your credit, score can range from the 300s to the mid-800s. A poor credit score in the 500s to the low 600s may mean you will be unable to purchase a home at this time. Even if you can find a lender who will approve a loan for you, the cost will be very high. Take some time to clean up your credit, working to achieve an excellent score.
- What are my feelings about home ownership?
The decision to buy is a definitely a practical one, but there are also emotional elements to consider. It's important to listen to what your feelings are telling you, too.
Pride. Excitement. Contentment. These are all feelings that homeowners know well. Many former renters feel a sense of security that comes from knowing no one but them will sell the home. When you rent, the owner may decide to sell the home or move back in after your lease is up. If that kind of control is important, you may want to purchase your own home. But if you still don't want the responsibilities that come with homeownership, there is nothing wrong with that viewpoint.
As a homeowner, you have a definite sense of place. You can only lose your home if you default on your mortgage payments (or in the very rare instance of “eminent domain” where the government can force you to sell your home for public use).
Bottom line? You are the only one who can measure all the practical and emotional factors that help you decide if it's time to buy, or if you're better off to continue as a renter. Be knowledgeable about your options and there's an excellent chance you will make the perfect choice.
CENTURY 21 B.J. Roth Realty Ltd., Brokerage*