Renting vs. Buying

e c n e l l e c x E f o n o i t i d A Tra

g n i y u B . s v g Rentin www.Alfonso.com

SHOULD YOU BUY A HOUSE?

4

AFFORDABILITY

5

MOTIVATION

6

BUYING A HOME

7

RENTING

10

BILLS

11

TIMELINE

12

CREDIT

13

OTHER CONSIDERATIONS

STNETNOC FO ELBAT

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SHOULD YOU BUY A HOUSE? Homeownership has been considered the American Dream for decades. When you weigh the pros and cons of owning a home, you will see that there are lifestyle and financial considerations.

Buying a home should be an individual and personal decision, rather than a market decision.

It is an investment that you make emotionally and personally, as well as financially. In this booklet, we will examine the pros and cons of owning vs. renting a home.

“If you are going to have a real dream, you need a real plan.”

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- Chris Hogan

“The caliber of your future will be determined by the choices you make today.”

Anthony O'Neal

AFFORDABILITY Rent vs. Buy Ratio There are many renting vs. buying

Ultimately you should determine your debt-

calculators online, but most compare

to-income ratio to help identify a wise

annual rents to asking prices. For example,

monthly investment. This number is used

there is a “rent vs. buy rule of 15.” This

by lenders to measure your ability to

formula multiplies the yearly rent of a

manage your monthly payments. To

comparable property by 15. (Example: If

calculate your debt-to-income ratio, add

rent is $1,000 a month, it’s $12,000

your monthly payments and divide them by

annually. Multiple that number by 15 and

your gross monthly income. (Gross monthly

you’ve got a suitable purchase price of

income is your total earnings before taxes

$180,000.)

and other deductions are taken out).

Trulia uses a “price-to-rent ratio” that follow

For example, if you have a $1500 a month

the same formula, whereby you take the

mortgage payment, plus a $100 car

list price and divide it by one year’s rent.

payment and an additional $400 a month

Using the example above, $180,000

for your remaining debts, your monthly

divided by $12,000 would be 15. Trulia

payments are $2000. ($1500 + $100 + $400 =

considers ratios of 1-15 as more favorable to

$2,000.) If your gross monthly income is

buy than rent, whereas numbers of 16 and

$6000, then your debt-to-income ratio is 33

higher support renting.

percent. ($2000 is 33% of $6000.)

N O I T A V I T O M FAMILY PLANNING If you’re ready to put down roots and start a family, consider buying property.

WRONG REASONS If you’re only buying because “it’s time” or you’re looking to get rich, keep renting.

Y E N O M

ADVANTAGES OF HOMEOWNERSHIP A Place of Your Own Pride of Ownership (Social Status,

BUYING

Accomplishment) You Make the Rules (Pets, Paint Colors, Etc.) You Can Build Home Equity and Wealth

Owning a home has been considered the American

Sizable Tax Deductions Possible

Dream for decades for many reasons. You’ll have a

Ability to Remodel, Expand and

place that is uniquely “yours” that you can

Tear Down

customize from paint colors to a remodeling project. Also, it may be a great way to build equity and provide security for you and your family.

Potentially Better for Children and Family Structure Mortgage Can Improve Your Credit History/Score Ability to Borrow Against Your

Overall, buying a home can be a good investment,

Home

but you need to remember you will be your own

Monthly Payments End Once the

landlord making you responsible for the

Mortgage is Paid

maintenance and upkeep of your home. You will

Fixed Payments (With A Fixed

also need to budget for home-related costs including utilities, homeowner association dues if any, homeowner insurance and property taxes.

DID YOU KNOW?

Mortgage) No Landlord Retirement Nest Egg

DISADVANTAGES OF HOMEOWNERSHIP More Responsibility and Liability

Inflation Hedge – Rates on 30-year fixed loan are

Home Prices May Lose Value

about 4% right now. That is a considerable incentive

Could Overpay for Your Property

to refinance an existing mortgage or to become a

Not Everyone Qualifies for a

first-time home buyer. As a renter, if future inflation pushes rents higher, you’ll be forced to pay more or to move into a less expensive home.

Mortgage You Must Pay Taxes and Homeowners Insurance Total Housing Payment Can Be More Expensive

Something most first-time homebuyers do not think

Sizable Down Payment May Be

about when deciding on renting or buying. When you

Necessary

outgrow your current home and are ready to move up,

Maintenance Costs Can Be

the equity built can be used as the down payment on

Excessive

the next house. If your children are attending a more expensive school than planned, the equity can also be used to pay tuition. You can utilize this asset for future expenses so consider it a forced savings plan.

HOA Dues (If Applicable) You’re in a Long-Term Commitment Transactional Costs of Buying and Selling Your Home Can Be Damaged or Destroyed You Can Lose Your Home Through Foreclosure

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Y E N O M

ed u n i t con

RENTING If it isn’t the right time to invest in a home, renting a home can be a good option. It’s a good idea if you are still saving for a down payment, working on repairing your credit score, you plan on moving shortly, or have other financial goals you value more than home ownership.

ADVANTAGES OF RENTING

DISADVANTAGES OF RENTING

May Be Cheaper Than a Mortgage Payment

Rules, Regulations, and Limitations

Fewer (If Any) Maintenance Costs

More Temporary, Less Stability

No Down Payment Required (Less Deposit)

Rental Payment May Exceed Monthly

No Real Estate Taxes (Renters Insurance

Mortgage Payment

Optional)

No Ownership or Wealth Creation

Freedom to Move or Downsize When

Payments Never End

Necessary

Rent May Rise in the Future

No Risk of Home Price Depreciation The Landlord May Pay Some Expenses May Include “Free” Amenities Such as a Pool, Gym and Security Leaving Your Funds Available to Invest in

You Walk Away with Nothing No Tax Benefits You’re at the Mercy of the Property Owner You’re Often Still Stuck in a Lease

Other Opportunities You Don’t Have to Worry About Foreclosure

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Could Be Forced to Move If Owner Sells

A comfortable house is a great source of happiness.

Sydney Smith

R A B C # S E R A C

"To give real service you must add something which cannot be bought or measured with money, and that is sincerity and integrity."

Don Alden Adams

S L L I B MORTGAGE When you pay off your home, it’s yours. You eliminate the expense of housing once you’ve paid it off.

If the home appreciates more than you’ve paid in mortgage, interest, taxes, and maintenance over time, you’ve earned a return.

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RENT PAYMENT

You have little control over how long you can stay there.

Your landlord can force you out or raise prices at the end of your lease contract. In the end, you don’t own the home despite all those payments.

There’s nothing to pass on to your children or to sell for a profit.

Additionally, your rent can and will most likely rise. You may be paying less than your neighbor who has a mortgage today, but if your neighbor’s mortgage is fixed, they’ll still be paying the same amount in the future while your rent increases.

E N I L E M TI

An important factor that buyers often ignore when prices and interest are low is whether this house will still be a good idea several years down the road. If you or your spouse is a student or in a job that requires occasional relocation, you’ll have to think about whether your house will be an asset or a liability if you have to move within the next five years.

Rule of Thumb: If you plan on being in the same home for more than 5-10 years, then it may be a good idea to buy. If you will only be in the home 35 years, then you might consider renting (the cost of selling the house may result in losing money if you live there fewer than five years). Also, think about how much home you need. If you know you are going to start a family, consider whether or not the home will still work once you hear the pitterpatter of little feet.

Knowing what direction you’re heading will help you to decide if a house is a good investment for you in the long term. www.Alfonso.com

T I D E CR

Having a mortgage can help you build your credit, but you will never be approved for a mortgage if you have poor credit.

The minimum credit score to get a mortgage is 580.

However, many mortgage companies will not work with you until you achieve at least a 640. When renting, the qualification is not governed by law, so the minimum is whatever the landlord is willing to accept.

Also, you may need a down payment that ranges from 5% to 20% depending on the lender’s guidelines and closing costs that you will need to bring to the closing table. Renters only have to come up with a maximum of a month or two of rent plus a security deposit.

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R E S H N T O O RATI E D I S N O C

Homeowner's Insurance: Protecting your investment comes at a higher price since you are ensuring the entire property. Renter’s insurance is much less as it only covers your personal belongings inside the dwelling.

Private Mortgage Insurance (PMI): If you have less than 20% equity in your home you can expect to pay PMI. This amount typically ranges from 0.50% and 1.2% of your loan. For example, 1% on your $200,000 mortgage would add $200 to your monthly mortgage payment until you build up at least 20% equity in your home. (This is approximate. Contact a lender for an exact amount.)

Property Taxes: These amounts range depending on which county you are in and whether or not you are within city or county limits.

When renting this amount is usually paid by the landlord.

Maintenance: Homeowners pay nearly $170 per month on average for regular maintenance and repairs.

The average does not include larger items such as a roof repair, new HVAC system and other things that can run four or five figures.

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