What You Need to Know About Buying a Home
Buying a house is a life-changing experience. It requires a huge investment of time and money, and can become a several decades-long commitment. If you're looking for fewer strings attached and less financial responsibility, try renting. That's the simple version. When you actually sit down to decide between renting and buying, here's what you need to know.
Deciding to Rent
Renting is convenient if you like to change things up or if your income is unstable (i.e. freelancing, temping, etc.) You aren't locked into a long-term investment, so there's freedom to move without hindrance, within the confines of rental contracts. You also don't have to worry about repairs or property taxes.
Another renting advantage is the ability to bunk in sweet digs without paying the high costs of a new house. Newer rental complexes with fresh-out-of-the-box appliances and modern styling may be available. Other amenities like a gym, swimming pool, free cable and included utilities are other great rental perks.
Preparing for the Future
Living in your childhood bedroom or bunking with strangers in a dorm can get old quick, but buying a house might not be in the budget yet. Renting provides a place to live and time to get financially prepared before you commit to buying. For example, lenders usually want no more than 28 percent of gross monthly income to be used to pay the mortgage, homeowners insurance, property tax and only 36 percent on total debt. Taking on debt without the income to support it is unwise, even if you qualify for a loan.
Deciding to Buy
The true cost of owning a house can be 45 percent more than the mortgage payments when things like property tax, maintenance, utilities and homeowners insurance are figured in. A down payment of at least 20 percent is also recommended to avoid having to pay mortgage insurance and higher interest rates. You'll also need several thousand dollars to close the purchase. You're ready to buy if you are educated on the true cost of homeownership, have determined how much you can realistically afford, have money for a down payment, don't want to move in the next few years and are ready for the upkeep and maintenance requirements.
Renting, in many cases, means paying someone else's mortgage. You pay for them to build equity and move closer to owning the property outright. By buying, you essentially pay yourself. Making a monthly mortgage payment reduces mortgage debt and gradually builds equity -- if the value of the house remains the same or increases. The downside, as the last few years have shown, is that real estate prices are always fluctuating, which can reduce home values and make the house worth less than what you paid.
Want to Invest?
A house can be a great investment if you want to live in it for more than a few years, but don't count on it being a guaranteed good investment. A short-term investment in a house (two years or less) is a bad idea, because the expenses of buying and selling may wipe out any potential profit -- especially if the housing market plateaus or falls. However, once the house is paid off, monthly expenses will be significantly reduced.
Investing in a house can have benefits before the mortgage is paid off. Mortgage interest -- which can equal thousands of dollars per year -- can be deducted on your taxes, meaning a big break at filing time. Also, the portion of the house you have paid down is a financial asset (it has economic value) and can be used to offset liabilities (debts). This means that homeowners can take out a home-equity loan (a second mortgage) and use it to finance other purchases. It's not always a good move, but it can create cash flow if needed.
If you're on the fence about buying a house, it's probably best to wait. In order to buy with a positive outcome, you need a strong financial position, a commitment to your location and the willingness to perform maintenance and upkeep. For some people, renting just works better.