To rent, or to buy? That is the question…
Anyone who gives you an immediate answer to this question is oversimplifying it, because everyone’s goals and financial situations are unique.
With federal interest rates on the rise, a lot of people are making the leap into homeownership, but how do you know when the time is right and if you’re ready for this commitment?
In tackling this question there are a lot of factors to consider, most of which are unique to your personal situation. That’s one of the reasons it’s so important to work with a realtor who takes the time to listen to your needs and goals.
Here are the 5 questions I explore with my clients to figure out what’s best for them.
- Can you reasonably afford the monthly payments?
This is a simple question that involves objective math, and if the answer is no, well then the decision is quickly made for you.
I say “reasonably afford” because, while you could throw every last penny into your mortgage payment, financial advisors generally suggest housing related costs should be less than 28% of your total income. And if you have considerable debt (from credit cards or student loan payments), your housing related costs plus debt payments should be less than 36% of your total income.
To quickly and easily estimate what your monthly mortgage payments would be on a potential purchase, you can use an online mortgage calculator, such as http://www.mortgagecalculator.org/ or https://www.zillow.com/mortgage-calculator/. There are a ton online, just be sure you consider some of the additional monthly costs on top of the loan itself – including private mortgage insurance (if your down payment is less than 20%), property taxes, home owners insurance, HOA fees, etc.
Also, Zillow’s House Affordability Calculator is great and simple tool that suggests what home price you can afford based on your personal financial situation; https://www.zillow.com/mortgage-calculator/house-affordability/.
In crunching the numbers you should also be aware that there will be a handful of one-time purchase closing costs, and you should budget for ongoing maintenance and repairs.
Some of these costs can certainly be offset by the many tax advantages of home ownership, including that home mortgage interest and property taxes may be deductible, the homestead exemption which could be as large as $50,000 in Florida, and the capital gains exclusions on sale. As always, consult your tax accountant regarding your specific situation.
So, do the numbers check out?
If so, the most important reason to buy is to build equity; ownership in something valuable, which is a big deal!
When you rent, every dollar is essentially being thrown down the drain (or better yet, being used to pay off your landlords mortgage). Not to mention the potential for significant returns if you can sell the house at a profit.
When you rent, every dollar is essentially being thrown down the drain (or better yet, being used to pay off your landlords mortgage).
However, in places where renting is cheaper than buying, some people prefer to rent and use the cash savings to invest in stocks, bonds, or mutual funds, for higher returns.
According to a report by Zumper, Miami is the 9th most expensive U.S. city to rent in, which is particularly challenging as incomes in Miami aren’t proportional.
Simply speaking, if the monthly costs of buying and renting wind up being relatively equal, a dollar invested in building equity is certainly much better than a dollar down the drain.
- How long are you planning to live here?
If you don’t see yourself potentially putting down roots for at least 5 years, it may not be the right time for you to buy.
It takes several years for your investment to truly pay off, since you have to pay a lot of closing costs when the deal finally closes. Plus the fact that in the first few years you are mostly just paying interest on your loan.
Also, if you are forced to move for something like grad school, or upsizing for more children, your investment becomes risky because you will be subject to the market pricing at the time, which is nearly impossible to predict several years in advance.
If you must move, there is always the possibility of leasing the unit out. While this has the potential to be an amazing investment, bring in revenue and pay itself off, for most people becoming a landlord is more complicated than they assume.
- Are you in a position to get a favorable mortgage rate?
Your mortgage rate impacts the total amount you wind up paying for the house, and therefore your chances of it being a good financial investment.
One of the biggest factors in your mortgage rate is how large your down payment is.
While most people assume you need a 20% down payment, the average down payment was just 11 percent in 2016, according to the National Association of Realtors®.
You might qualify for a mortgage with just 3-5% down, but just know that the lower your down payment is, the higher your mortgage rate and PMI will be, and the more you’ll pay in the long run.
Some people wait a few years and save up to make a larger down payment, but the downside here is that standard price appreciation will cause the same investment to cost more a few years in the future. To help with this decision, the mortgage industry blog, MGIC Connects, created the Buy Now vs. Wait calculator that helps you figure out whether you’re better off waiting and continuing to save for a bigger down payment or buying now with less money upfront.
In addition to your down payment, your credit score will impact your mortgage rate, so be sure to run a credit report and if your score is less favorable, it may be worth waiting and taking actions to get it increased.
- Can you deal with the upkeep and maintenance?
One of the biggest advantages to renting is that it’s much more carefree. When a pipe bursts, you just call the landlord and it’s their problem to deal with (and pay for).
Homeowners generally set aside 1% of purchase price annually for ongoing repairs – not to mention the temporary inconvenience and time it takes to manage and coordinate the repairs.
Especially for older homes, you’ll want to have an emergency fund in place for the unexpected problems that will inevitably come up.
On the other hand, having control of the property comes with some big advantages such as the ability to remodel and (association permitting) own pets.
- Is it a good time to buy?
There’s a lot to consider here. From global issues such as politics and the stock market, to national interest rates and currency value, to local supply vs demand.
At the moment, a lot of people are motivated to buy because interest rates are rising and expected to continue to rise throughout 2017.
In greater Miami and Miami Beach, the influx of new developments over the past few years has created a “buyer’s market” and a trend of decreasing prices.
Ultimately you’ll have to weigh all your answers above against your personal goals and values in deciding what’s best.
Before investing hours on Zillow hunting for your dream house, I strongly urge you to get pre-approved for a mortgage so you know what price range is really an option. Shop around. Talk with several different lenders to see all your options.
If you’re interested in getting an expert opinion on your unique situation and goals, reach out and I’d be happy to sit down and talk through your options.