The age old question - should I rent or should I buy?
The answer to this depends on your situation. Here are some questions you should be asking yourself:
- Are you planning on staying where you are for a year or more?
- Do you have some money set aside for a down payment?
- Do you have steady employment (or income), or will you if you're coming from out of town?
Did you answer yes to these, but are still indecisive?
Here are a couple more questions:
- Do you mind paying down someone else's mortgage?
- Are you comfortable with the idea of owning a tangible asset?
Ok, so now you're entertaining the idea of purchasing Real Estate, but you're probably wondering "Isn't it a long and complicated process to buy a home?". The answer is no. Or maybe you're saying "Well I don't need a house, I just want an apartment". Well you can buy those too, here's how owning works.
Let's say you have a $5000 down payment, that's 5% of a $100,000 2 bedroom condo. You would then have a $95,000 mortgage on the property. A $95,000 mortgage with a 20 year amortization period (the number of years it takes to fully pay down the mortgage) will cost you (as per any mortgage calculator on the internet) roughly $526/month. Assuming you locked in your interest rate of 3% (these days you can get even lower than that) for 5 years and made every payment in that time, at the end of those 5 years you will have paid off $18,735. This is what people refer to as equity, which means when you sell the condo you recover all that equity from the proceeds of the sale and can do what you please with it.
Basically renting works the same way. You have to deposit first and last, and you have to pay every month. Yes the Landlord might have to cover repairs here and there for you, but at the end of the day you're building his equity with your hard earned money.
First time home buyers are generally unsure of how to approach the process of purchasing a home, so I'm going to jump right into it and show you step-by-step how it works:
- Find a mortgage broker, or go to your bank and get pre-approved for a mortgage. This step is absolutely crucial. I can't stress this part enough, you need to know what you qualify for and where your limits are. Generally this can be done over the phone in about 5 - 15 minutes, and with the correct documents they will be able to let you know within a day where you stand.
Even if you know you'll qualify, in a hot market a proof of pre-approval from the broker may be the tipping point to getting your offer dealt with over a competing party. The other side of the coin is that after they accept the offer, it makes the process on the lender's side much quicker.
- Find a Realtor you like and stick with that one.
Listing agents have a legal binding contract with their seller to get them the highest dollar on their house, not you. Not to mention they usually can't provide you with the advice a Buyer's agent would be legally bound to provide. I could go on for days about the benefits of using a Buyers agent, but if there's one take home message it's this: Buyer's agents only work for you in this transaction, and therefore want to you to get the best deal possible. You'll get an unbiased opinion and valuable advice.
- Start looking for a house/condo/apartment/whatever you are in the market for. Have realistic expectations.
- When you've found what you want, talk to your Realtor and make an offer, negotiate the offer and have all parties accept it.
- If you opted in to a home inspection, then you'll want to get the place inspected. The lender will begin the process of fully approving the mortgage and sending all the documents to the lawyers, etc..
Note: If there is an issue that pops up on the home inspection, you would have a couple options:
Back out of the deal
Work something out with the Seller
- If you opted for a final walk through, then you'll want to do that a day or two before you take possession of the home.
- Closing day, or day of possession: You'll have an appointment with the lawyer you are using to sign the documents and you'll have your keys.
And that's it. Note that if you're thinking "I don't know a home inspector, a lawyer or a mortgage broker", that many Realtors will have a team that they use consistently and will be able to refer you if need be.
In short, we went over the concept of using a little bit of money to purchase an asset worth about 20x that amount, how building equity in that asset over time works and the general process purchasing a home.
If you answered yes to all 5 questions I listed at the top, then you should stop and think about the reasons you're working and where you want to be 2, 3 or 5 years down the road.