I was out with a client the other day and we got to talking how they had decided to purchase a home now. They were relatively young, but had saved, and so had a good chunk to put down, as well as have reserves in their account. It made sense for them to consider purchasing. But how do you know if you’re ready to buy? Should you buy a home? Should you rent? How do you budget to know? How do you know what your credit is like and if the mortgage person you’re talking to is taking you on a very bad ride through the world of loans? ALL good questions, and many the typical first time home buyer asks.
I love selling real estate, don’t get me wrong. That said, there are some people who should just rent- owning real estate is not a good idea for one reason or another. A fewthings to consider when thinking of what it will mean to own a home versus continue renting:
- Do I have money left over each month to save?
- Do I have money in savings?
- How long have I been at my job and is there a chance I will be relocated with a promotion?
- What kind of debt do I have and how soon will it be paid in full?
- In renting, who pays my utilities- gas, electric, water, sanitation services, and other recurring monthly housing expenses?
- Would there be a tax benefit to owning versus renting?
- Do I have the time and energy to dedicate towards keeping a house up? (if considering single family properties)
Depending on how you answer these questions, you may have your answer already. If you have not been able to save after all your monthly expenses each month, in order to own, you need to realistically be paying less on a mortgage than you do in rent each month.
I would like to point out that this is very possible to pay less each month towards a house versus renting. Plus you get the tax benefits of owning. (Potentially- talk to your tax advisor for the specific guidelines) You hear about rates being at historic lows, and I’ve talked plenty about my love of numbers/ mortgages/HUDs…. so a little example:
Purchase Price:$150,000 (this encompasses pretty much all the various properties that would be typical for a first time home buyer)
Interst Rate: 4.625% ** (rate quoted on Wells Fargo Home Mortgage’s website today as of 3PM. I’m not endorsing the use of or stating this rate will be the rate you will get.)
Down Payment: $5250 (3.5% as required for FHA financing. Your figure may be higher depending on several factors)
Total Loan amount (est): $144,750
Total Principle and Interest payment: $744.16
Using the same numbers with a $100,000 purchase price, you’ll be looking at $496.11 per month for principle and interest! If you had no other debt, you could own a house with an earned income of around $20,000 with that monthly mortgage payment. With the $744 payment, that means an income of about $28,000. Of course, if you have other debt, a car loan, student loan, credit card, etc, that number will be different. Taxes and insurance are variable based on the property, so those need to be figured on top of the principle and interest payment.
So buy versus rent? Like I’ve been saying, we’ll be hard pressed to be in another climate such as this again. All time low rates and home prices, yes combined with lower incomes and other factors, but the ability to buy now is really great. You don’t have to be stuck renting, thinking it’s impossible to purchase. There are down payment assistance programs, there are incentives to purchase in downtown St. Paul and Minneapolis. There is rural housing assistance available. This climate will not last forever- for a while? Yes. Forever? No. Strike while the iron’s hot and look into buying. Your opportunity is now.
**Interest rate subject to change. Payment information based on principle and interest only. Taxes and insurance may vary and are not included. Not all will qualify for lowest rate possible. Subject to approval based on credit, assets, income, and other information deemed necessary by lender. Payment is estimate only and should not be construed as an offer to lend or approve financing. Kristi Carstensen is not a liceneed mortgage banker offering suggestions of possible payment scenarios for hypothetical purposes only. Income levels given are representations of scenarios if and only if qualifying was based simply on principle and interest payment and does not factor in taxes, insurance, association dues, mortgage insurance, and so forth. Contact your mortgage professional for a true and accurate quote based on your specific situation. **
