Ready to buy a home? Some things to think about
Don’t worry. We won’t try to talk you out of anything.
Want flexibility? Then rent
You are more mobile when you rent because you can move out at the end of the lease. Buying a home entails a lot of upfront costs, from the down payment to inspections to loan fees. Renting carries fewer upfront costs.
Equity is great when you build it
On the other hand, renting does carry a hidden cost: You don’t build equity.
What is equity?
When the home’s value rises while the mortgage debt falls, you’re “building equity.” It’s like owning a stock whose price goes up.
Home’s value – Mortgage debt = Equity
“History shows that homeowership is a pretty good investment,” says Malcolm Hollensteiner, director of retail lending, sales and production for TD Bank.
But homeownership is sometimes a money-losing venture, as victims of the housing crash can attest.
Own for the long term
If you have a time horizon of less than five years, then homeownership is likely not the right option. It is likely to take as much as five years for you to come out ahead on your purchase, after taking into account the costs of buying and selling the house.
Get ready to be landlord-free
Can you afford to maintain and repair a home? Homeowership expenses are not confined to the monthly house payments.
“There are a lot of other costs associated with homeownership,” housing economist Ralph McLaughlin says. “These include things like maintenance on your house, any sort of refurbishment that you might have to undertake, any sort of emergency repairs.”
Compare home appreciation with rent
If owning costs more per month than renting, the calculation doesn’t stop there. A house has a good chance of rising in value over the years, even as monthly payments stay about the same. Meanwhile, rent is likely to go up.
You have to balance home-value appreciation with the upfront costs of buying. Richard Green, a professor at the University of Southern California, Los Angeles, offers this rule of thumb:
“If house values have to go up about 3 percent a year over rent for you to break even, then, depending on your living in a place for five years, buying is a better bet than renting. If you have to get 5 to 6 percent appreciation every single year, then you are better off renting from a purely financial standpoint.”
Think of school
If you have young children, owning a home lets you lock in your housing costs so you can give the children the stability of staying in the same school district for an extended period.
Exploit the tax advantage if you can
Another factor to consider is whether you will be able to deduct the mortgage interest expense. Tax laws allow those who itemize their taxes to write off their mortgage interest payment, which means you pay less for your mortgage. But not everyone is eligible to itemize deductions.
Don’t make it your primary investment
If you are focused on the investment potential of owning your home rather than the softer aspects of security and stability, then you might be better off renting.
“The idea that homeownership doesn’t carry a lot of risk with it is wrong,” says Green, the USC professor. “If you are in a mutual fund, with a long-term perspective, it is probably going to grow faster than real estate values. Housing can be more volatile than you think (depending on location).”