Buying your first home or continuing to live on rent is not an easy decision to make. In the current volatile housing market, it is a challenge to pinpoint when to make the switch and what is the right time to start on your homeownership project.
Let us study both perspectives.
Remember the pandemic when home prices had reached an all-time high, pushing first-time home buyers out of contention? Combined with high mortgage rates, home ownership had become a dream and most potential investors had waited for prices to cool down before taking the plunge.
So, is renting a preferred option? Not exactly. Inflation has dragged rents along with it and both have soared to unprecedented levels. Given the present low housing inventory levels, rents are unlikely to cool down either.
Comparing the two – buying your first home and renting – homebuyers can lock in mortgage payments for a fixed tenure but there is no such control over increasing rents. There are a lot of factors you must consider when choosing one of the two.
Luckily, you don’t have to do it alone. Reach out to schedule a free consultation and we’ll help walk you through your options. You may also find it helpful to ask yourself the following questions:
- How long do I plan to stay in the home?
New homes for first-time buyers are advisable only if you are sure that you will retain the property for a minimum of five years. However, if you plan to sell your house in a shorter time, buying your first home will not be economically beneficial to you. This is because even with an appreciation in the home value, it might not be enough to cover all the acquisition costs.
Even though housing markets are typically volatile, home values appreciate more than the downswings, thereby riding out the fluctuations. Hence, you stand to gain a lot from appreciated value if you own a property and hold on to it.
Further, once you like the neighborhood and the community and feel comfortable living in that location, buying over renting is a better option. Apart from feeling stable and secure in your surroundings, the more you keep your property, the more will be the equity you build up over time due to the appreciated value and paying down your mortgage.
Finally, after buying your first home, if you plan to stay for the tenure of the mortgage, your housing costs become zero after you pay off your loan. You can then sit back and watch your equity and net worth grow over time.
Given all these variables, you have to decide now whether to go with renting or become a first-time home buyer.
2. Is it a better value to buy or rent in my area?
If you know you plan to stay put for at least five years, you should consider whether buying or renting is the better bargain in your area.
One helpful tool for evaluating your options is a neighborhood’s price-to-rent ratio: just divide the median home price by the median yearly rent price. The higher the price-to-rent ratio is, the more expensive it is to buy compared to rent.5 Keep in mind, though, that this equation provides only a snapshot of where the market stands today. As such, it may not accurately account for the full impact of rising home values and rent increases over the long term.
According to the National Association of Realtors, a typical U.S. homeowner who purchased a single-family existing home 10 years ago would have gained roughly $225,000 in equity — all while maintaining a steady mortgage payment.6
In contrast, someone who chose to rent for the past 10 years would have not only missed out on those equity gains, but they would have also seen U.S. rental prices increase by around 66%.7
So even if renting seems like a better bargain today, buying could be the better long-term financial play.
Ready to compare your options? Then reach out to schedule a free consultation. As local market experts, we can help you interpret the numbers to determine if buying or renting is the better value in your particular neighborhood.
3. Can I afford to be a homeowner?
Once you decide that buying a home is a better option than living on rent, you must start preparing to fulfill first-time home buyer’s requirements. The major point here is to evaluate whether you are financially ready to take the plunge.
First, evaluate the savings that you have for a down payment and meeting closing costs. After these two, do you have enough money for ancillary expenses or emergencies? If yes, go ahead with your dream project, if not, wait till you are comfortable financially and have enough in the bank for a rainy day.
Next, consider how buying your first home will impact your monthly budget. Additional expenses will not be limited to only mortgage payments but will also mean making provision for insurance, property taxes, maintenance, association fees, and repairs.
Even after all these expenses, you might find that the outgo if you are a first-time home buyer is comparable to rent payable. This is especially so if you make a large downpayment as part of your first-time homebuyer requirement.
Finally, even though you will be the one paying for all repairs and renovation, every investment will upgrade your house and increase its curb value.
If you want to buy a home but aren’t sure you can afford it, give us a call to discuss your goals and budget. We can give you a realistic assessment of your options and help you determine if your homeownership dreams are within reach.
4. Can I qualify for a mortgage?
If you’re prepared to handle the costs of homeownership, you’ll next want to look into how likely you are to get approved for a mortgage.
Every lender will have its own criteria. But, in general, you can expect a creditor to scrutinize your job stability, credit history, and savings to make sure you can handle a monthly mortgage payment.
For example, lenders like to see evidence that your income is stable and predictable. So if you’re self-employed, you may need to provide additional documentation proving that your earnings are dependable. A lender will also compare your monthly debt payments to your income to make sure you aren’t at risk of becoming financially overextended.
In addition, a lender will check your credit report to verify that you have a history of on-time payments and can be trusted to pay your bills. Generally, the higher your credit score, the better your odds of securing a competitive rate.
Whatever your circumstances, it’s always a good idea to get preapproved for a mortgage before you start house hunting. Let us know if you’re interested, and we’ll give you a referral to a loan officer or mortgage broker who can help.
| Want to learn more about applying for a mortgage? Reach out to request a copy of our report: “8 Strategies to Secure a Lower Mortgage Rate” |
5. How would owning a home change my life?
Before you begin the preapproval process, however, it’s important to consider how homeownership would affect your life, aside from the long-term financial gains.
In general, you should be prepared to invest more time and energy in owning a home than you do renting one. There can be a fair amount of upkeep involved, especially if you buy a fixer-upper or overcommit yourself to a lot of DIY projects. If you’ve only lived in an apartment, for example, you could be surprised by the amount of time you spend maintaining a lawn.
On the other hand, you might relish the chance to tinker in your very own garden, make HGTV-inspired improvements, or play with your dog in a big backyard. Or, if you’re more social, you might enjoy hosting family gatherings or attending block parties with other committed homeowners.
The great thing about owning a home is that you can generally do what you want with it – even if that means painting your walls fiesta red one month and eggplant purple the next.
The choice – like the home – is all yours.
HAVE MORE QUESTIONS? WE’VE GOT ANSWERS
The decision to buy or rent a home is among the most consequential you will make in your lifetime. We can make the process easier by helping you compare your options using real-time local market data. So don’t hesitate to reach out for a personalized consultation, regardless of where you are in your deliberations. We’d be happy to answer your questions and identify actionable steps you can take now to reach your long-term goals.
The above references an opinion and is for informational purposes only. It is not intended to be financial, legal, or tax advice. Consult the appropriate professionals for advice regarding your individual needs.
Sources:
- CNN –
https://www.cnn.com/2022/08/11/homes/home-prices-second-quarter/index.html - NPR – https://www.npr.org/2022/07/14/1109345201/theres-a-massive-housing-shortage-across-the-u-s-heres-how-bad-it-is-where-you-l
- Bankrate –
https://www.bankrate.com/mortgages/5-year-real-estate-rule/ - Federal Reserve Bank of St. Louis –
https://fred.stlouisfed.org/series/MSPUS - National Association of REALTORS – https://www.nar.realtor/blogs/economists-outlook/price-to-rent-ratios-by-state-from-2014-2019
- National Association of REALTORS –
https://www.nar.realtor/blogs/economists-outlook/single-family-homeowners-typically-accumulated-225K-in-housing-wealth-over-10-years
Statista –
https://www.statista.com/statistics/200223/median-apartment-rent-in-the-us-since-1980/