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By Nicholas M Brown
The decision to buy a home is one of the biggest decisions a young family can make. The transition from renting to buying is all about timing and opportunity. Currently, nearly all major metropolitan markets are currently favoring buyers. On average, renters today need to dedicate 29.5% of their income to afford median rent, whereas buyers only need to dedicate 15.3%. That is a major difference .
There are, however, additional costs and considerations to make before jumping headfirst into the real estate pool. Some things to consider when deciding whether you’re ready to make the switch are listed below .
1. Staying Put? For people who are planning on living more than five years in the same house, there are definite financial benefits to buying a home in nearly all markets. At 5% annual increase for renting, an $800/mo rental becomes more expensive than a $1000/mo mortgage in six years, for example (not including taxes, insurance, etc.)
For anyone anticipating moving before then, renting is the way to go. This is a basic rule of thumb .
2. Property Taxes and Mortgage Interest Deductions. Homeowners pay property taxes on their homes, whereas renters do not. This amount needs to be factored into your budget. However, there are tax incentives given to people deducting mortgage interest. On average, property taxes are between a 0.5% and 1.5% share of the home price, but this varies state-to-state and county-to-county. Most levy about $1,000 on taxes, on average. In 2012, middle-class homeowners saved an average of $615 on their taxes by deducting mortgage interest. Taking this into consideration as part of your annual costs is crucial .
3. Homeowners insurance. Similarly, homeowners insurance is not required by law, but in many cases your mortgage lender or neighborhood association may require you to purchase it as part of the terms of the sale agreement. The cost of homeowners insurance is wide-ranging depending on the size of your home and where it is located. On average, it costs between $300 and $1000 annually. Renter’s insurance, which is more often optional, costs on average around $200 .
4. Buyers vs. Renters Market. As was mentioned above, there is currently a market that favors buyers over renters. But where, and by how much? A recent survey of housing prices predicted that all but two of the top 100 markets will favor buyers, some by considerable amounts (the two renter-favored markets are Honolulu and San Francisco, not surprisingly). Even in competitive metro markets like New York City and Los Angeles, buyers were predicted to have upwards of a 20% savings advantage over renters in winter 2014. Looking into the pricing advantages afforded to buyers, with considerations made for tax and insurance, will provide you with an excellent picture of where your advantage lies .
5. Closing Costs. Closing costs is the blanket term applied to the series of fees and charges that come with closing on a home. This can include attorney’s fees, appraisal fees, title insurance, inspection costs and more. On average, closing costs run between 2% and 5% of the purchase price of a home. A recent survey found that the average closing costs total hovers around $3,700 .
6. Personal Finances. This last consideration has less to do with market fluctuation and more to do with your personal finances. People who do not have likely long-term stable employment should steer away from buying a home. In many cases, people may have difficulty securing a mortgage loan, thanks to an imperfect credit history, substantial debts or low savings. While there are options for people who want to buy but can’t currently secure a mortgage immediately, getting a realistic idea of your financial picture is crucial for making the right decision .
BUYING Pros and Cons
You’re developing a long-term investment that you get to live in. For most Americans, their home is the biggest piece to their financial puzzle. Your rent is going towards owning equity .
You get favorable tax breaks on your investment. Reduced taxes aimed at incentives for home-ownership are often generous .
You have the flexibility to make changes to your home as you see fit. Don’t like the kitchen? Renovate it !
All renovations are on your shoulders. Or, more accurately, your wallet. When the roof leaks or the furnace stops, there’s no one to call but you .
If you decide to move out, you are still responsible for selling the property or finding tenants. If things break while you have tenants, you are still responsible for upkeep and repairs .
RENTING Pros and Cons
Freedom. When your lease term is up, you can pack up and go where you please.
If something big breaks, you are off the hook. Your landlord will replace major structural problems with the property, including appliances on occasion .
In most cases, rent goes up on a yearly basis. People who anticipate staying in a rental for a long period of time will end up paying a mortgage rate payment within a matter of several years .
When you pay your rent, you aren’t paying into your investment. You also are limited as to upgrades and renovations you can make on your space as well .
We’ve all had absentee landlords. You know, the ones who let repairs slide, or have a “friend” come by who clearly isn’t qualified to do the task at hand .
Looking for a place to call home is a big deal. And for most of us, home is usually depicted as a standalone house on your own piece of land–not a unit in a building structure–and so getting to live in your own house can be a dream come true. Just make sure that whatever you decide on, make it be a decision of both the heart AND the mind (and your wallet) and think about all of the above considerations carefully as well .