Financially Free Gen Z
Episode 4: Should I Buy or Rent My Future Home?
Emma: Welcome to Financially Free Gen Z. I'm Emma Barger, a Marketing Specialist at Coulee Bank.
Rachel: And I'm Rachel Munger, a Communication Specialist at Coulee Bank as well.
Emma: And in today's episode of our podcast.
Rachel: We will be talking about something we all have or will have to think about Should I rent or should I own my future home? So in this episode, we're going to be covering the responsibilities of renting and owning, the biggest differences between the two, and then ultimately, which of these is better and which of these is the right choice for you?
Rachel: We will also hear from Dominick Sweeney, who will help us answer some commonly asked questions.
Emma: So starting off with the responsibilities of renting. When you rent a home or an apartment, you enter a mutual agreement with the landlord that includes responsibilities for both parties yourself and your landlord. So depending on what your lease, you will be responsible for paying your rent on time until your lease ends. You typically agree in your lease to keep the property in good condition and notify the landlord if any problems occur.
Emma: In my last apartment I had a pipe burst that was quick, quick covered. In some rental situations you might be responsible for utility costs that might be separate from your rent, such as water, energy, trash, all the good things. And then often landlords also recommend or require renters to have renters insurance for the duration of the time that they are occupying the property.
Rachel: Yeah, renters insurance was something that confused me when I started renting an apartment. I was like, Wait, don't you have insurance? Why do I also have to have insurance? But helps you protect your end of things and the stuff in your home, potentially. So some of the responsibilities of owning a home, When you own a home, you're not going to be entering into an agreement with a landlord, but you are entering into an agreement with the person who is going to be providing your mortgage.
Rachel: So you will have responsibilities to pay your mortgage payment each month and then there are other mandatory costs, such as property taxes, homeowner's insurance, and potentially PMI. If you're going to put less than 20% down on your home. So it's important to look at the full picture of what you're going to be paying each month. And if you're working with a good mortgage loan officer, they're going to lay that out for you really clearly.
Rachel: You're going to understand on the front end what your actual monthly payment is going to look like with all of those things combined. As a homeowner, you're also going to have responsibilities for things such as your water bill, your energy bill, your trash bill, which you may have if you're renting as well. Unlike renting, when you own your home, all of your repairs and your maintenance are up to you.
Rachel: So it's important to budget for that because you never know when your furnace or your hot water heater is going to go out and you just want to be ready for that because it is your responsibility when you own your home.
Emma: So there are some differences that we have brought them up. You might be able to tell between renting and owning, but one difference would be the down payment. When buying a property, your mortgage provider is going to require a down payment on the loan. The industry average is about 20%, but there are many helpful programs for first time homebuyers that offer down payment assistance where you could pay as little as 1 to 3%. When renting a home,
Emma: You don't have to make any sort of down payment. Your landlord might require a security deposit of some sort, but you usually get this money back in the end, as long as there's no damage to the property.
Rachel: Another big difference between renting and owning is equity. So when you're renting your apartment, you pay your rent every month and you pay that to your landlord and that money is then gone. This isn't always necessarily a bad thing because housing is always going to cost you money and it can be great to rent while you're saving up for a down payment or saving up to be more financially ready to buy a home.
Rachel: But when you own your home part of your mortgage payment each month will go towards your principal and another part will go towards your interest. So your principal is your equity in your home. So rather than paying an outside entity when making your payment each month like a landlord, you're essentially paying yourself because you're slowly owning more and more of that home.
Rachel: So it is important to understand that at the beginning of your mortgage, a large portion of your payment is going to be going towards interest. But the longer you stay in your home, more and more of the payment each month will go towards your principal and the more of your home, you’ll own. So paying your mortgage every month is essentially a forced savings account where you're forced to invest in yourself and in your future.
Emma: Yeah. And the last difference that we would like to note is the flexibility when it comes to renting and owning. When you buy a home, you do lose some of the flexibility that you have when renting. Since renting is short term, when your lease is up, you're free to move anywhere and you don't have very many financial implications. However, when you choose to own a home and you move as a homeowner, you have to sell your house, which could have some significant costs due to real estate commissions, closing costs, home repairs, etc..
Rachel: Yeah. So which one of these is better? It's ultimately going to depend on your life stage, like neither one is inherently bad or inherently good. Both of them have their place. But
if you know you're going to be moving in the next year or two, you probably don't want to buy a home where you are. It would make sense to maybe rent for a year and wait until you're in a permanent spot.
Rachel: But if you are in a financial position to buy a house, it can be a really good investment in yourself and in your future. And yeah, you really have to crunch the numbers for yourself and see in your circumstance which ones are going to be best for you.
Emma: Next up, we have a guest from Coulee Bank with us today. We have Dominick Sweeney, Vice President, Mortgage Loan Officer at Coulee Bank. Thank you, Dominick, for joining us today and sharing your knowledge with all of us.
Dominick: Yeah, it's great to be here, guys. Thank you.
Emma: I know we highlighted maybe some of the differences, positives and negatives, but what are some benefits of owning a home?
Dominick: As Rachel kind of alluded to already, I think one of the greatest benefits to owning a home is you're setting a great foundation for yourself financially. So every payment you make, some of your payment is going to go to equity. In addition to that, you're not making your landlord's equity larger and you're also experiencing appreciation normally with your home.
Dominick: So when you invest, usually you're going to have an increase in the home's value and you're going to owe less and less on it. So it's a great financial decision if you're ready for it. Another benefit is mortgage payments are generally more stable than rent. Rent can go up and down, well not down. It can go up on an annual basis.
Dominick: And generally mortgage, you know, the actual mortgage payment, the principal and interest is not going to go up unless it's an ARM, adjustable rate mortgage. So as long as you're getting a fixed 30 year loan or shorter term, that principal and interest is going to stay the same. The only thing that would increase or possibly decrease would be your taxes and insurance.
Dominick: So minimal increases to your mortgage payment compared to rent.
Rachel: How do you know when you're ready to buy instead of rent?
Dominick: Yeah, like you guys said, the biggest thing is, is you just have to be ready to settle down because there are significant costs associated with not only buying but also selling. If you're not sure that you're going to be somewhere. I think renting is a great option because it can save you quite a bit of money. On if you're going planning to leave or temporarily living somewhere you also want to think about some of the extra expenses involved with owning a home like landscaping or utilities, well you have utlities when you rent too.
Dominick: But things like that that go with, you know, maybe your furnace needs to be repaired. So things like that. So make sure you have a cushion as well as a down payment. So, you
know, being financially ready for it. But on the same side, on the other side of the coin, a lot of people that are ready to own haven't tried to go through the process.
Dominick: So a lot of people can qualify that. Don't think they can. So it's worth your time to talk to a mortgage lender and find out.
Emma: Awesome. So many Gen Zers are still in their teen years and the thought of renting or purchasing a home in the future might seem a little far off. But what steps can younger members of this generation take to prepare themselves for buying a home in the future?
Dominick: The biggest hurdle that somebody that's young needs to clear is, is to have a credit score, establish credit, and have good enough credit to qualify so you can open a credit card as young as 18 and start establishing credit at that age. I've done personally mortgages for people as young as 19. So it's certainly not a not a huge hurdle for for for the right person if they've taken the right steps.
Dominick: So as long as you, you know, begin to build credit, make your payments on time, you know, keep your credit card revolving credit utilization as low as you can, these things will help you build a great foundation to be able to buy a home when you're when you're ready.
Rachel: So, yeah, that's always the the hardest thing for young people is that they they want you to have a lot of years of credit, but you're only like 20 years old. So that can be hard to do.
Dominick: Right? Right. Yeah. I think the biggest thing with being a young person is if you can open a couple of lines of credit, not necessarily just credit cards, but even installment loans and just make the payments on time, you'd be surprised how quickly you'll build good credit. So, yeah.
Rachel: Do you have any recommendations for first time homebuyers who don't have a 20% down payment ready?
Dominick: Great question. So I would say this is realistically of the first time homebuyers that I work with seriously, like 98 or 99% of them do not have 20% down. So there are many programs available in every state for folks to get into homes for much less than 20% down. For example, the Wisconsin program state program is called WHEDA, and that is actually a 0% down program.
Dominick: So there are a multitude of options available to folks to be able to buy a house. You just have to ask and inquire with a mortgage loan officer. But it's very uncommon to see somebody with 20% down be a first time homebuyer. So just keep that in mind.
Emma: So the cost of financing has significantly increased over the last year. How can first time homebuyers set themselves up for success in this market?
Dominick: I think a good rule of thumb is to always base your your pre-approval amount or your home purchase. You know, as as interest rates are higher on the payment. So whenever I start a pre-approval with somebody, I'm going to ask them right away, what is your desired payment that's going to help you keep your purchase within a range that you feel you can afford.
Dominick: And sometimes what we can make you qualify for is not what you yourself feel comfortable with. So always base your purchase on a payment amount and that'll help you stomach the larger interest rates. Like they always say, love the property and date the rate. You can always refinance the rate later on. But right now, you know that's that's key is to keep that payment and not only the payment but subsequently the purchase price somewhere where you need it to be.
Rachel: Awesome! Well, thank you so much for that. I know I've been in the process over the last year, not quite a year ago I put an offer in on a house and it was a different market then and somebody was willing to offer 20,000 more dollars than asking, and I just couldn't do that. So it it's a interesting time to be buying a home, but it's definitely been exciting and there's just so much for me when I went into it that I felt like I didn't know.
Rachel: So as a younger person, I think it's great to get these resources out there for people so that they understand that it is possible to make those steps for homebuying.
Dominick: Absolutely. And I think education is extremely important. So make sure you're working with somebody that has your best interests at heart and wants to educate you on what it's like to buy a home and the factors that are involved with it.
Rachel: So yeah.
Emma: I always feel like buying a home is such a such a big thing. And, you know, I feel like especially learning more about the housing market and learning more about how mortgages work and stuff, it's really not so intimidating. And I think, Dominick, I just want to say thank you for, you know, easing maybe younger people's minds about the down payment I think is the scariest thing.
Emma: I think I'll never get there. But hearing that there are assistance programs out there for first time homebuyers is really reassuring.
Dominick: Yeah, absolutely. Yeah. And there's a lot of ways to get a down payment, too. So just definitely, definitely consult with a mortgage lender because sometimes they can be magicians when it comes to that too.
Rachel: Awesome! Well, thank you so much for sharing your knowledge on all this. We also want to thank all of our listeners. We will be back again next month. We'll be doing monthly episodes, so make sure to follow us wherever you stream or listen to our podcast so that you're the first to know when the next one comes out.
Rachel: We look forward to being with you all again in a month, and thank you for listening.