Want to buy a home? Here are seven things to ponder
Buying a home is considered by many to be part of the “American Dream.” But along with the realization that even if you can afford to buy a home, it may make better sense to rent than to buy. Below are seven points to consider when making this important decision.
1. Debt: Unfortunately many individuals borrow more than they really can afford. A home mortgage, due to its size, can compromise your debt to income ratio and thus limit your ability to borrow for other necessities such as a car. The debt to income ratio is calculated by dividing total debt payments by gross income. This ratio should not exceed 0.36 or 36 percent.
2. Investment: Purchasing a home is not always the best investment decision. Your mortgage down payment has an opportunity cost, meaning it could be invested elsewhere. Depending on real estate appreciation and returns on other investments, like the stock market, you could be better off renting and investing the mortgage down payment as well as any cash flow difference between the mortgage and rent.
3. Interest and Taxes: Interest on a mortgage and property taxes can be deducted from your income taxes; however, everyone gets the standard deduction ($6,200 filing single and $12,400 filing married) so your interest and property taxes may not even exceed the deduction you would be getting anyway. In the current environment of low mortgage interest rates, it may be more difficult to exceed the standard deduction. Keep in mind that this deduction could be phased out in the future with changes in the tax code.
4. Money and Time: Homes consume a lot of money and an awful lot of time. In addition to your mortgage payments and taxes, you will have maintenance, insurance and possibly Home Owner’s Association (HOA) fees. You will spend time fixing things that break and mowing the lawn. Many of these costs and time-consuming activities are covered by the landlord when you rent.
5. Mobility: If you own a home, it will make it more difficult to move. Breaking a lease is much simpler and cheaper than selling your home. This inflexibility can impact your career decisions and other important life choices.
6. Location: The local real estate market can have a big impact on the rent vs. buy decision. For example, an abundance of rental units and/or high home prices will make renting a better choice. At www.trulia.com, you can compare the cost of renting to buying. Included in the analysis are, not only your area rental and home prices, but also the length of time you plan to stay in the home. High rent and long-term ownership make owning a better choice. An abundance of financial calculators can be found online that can help you navigate the decision process.
7. Nonfinancial: When making your decision, don’t forget to factor in the nonfinancial reasons to buy a home such as pride of ownership, no landlord hassles, and freedom to do what you want. If you own your home, you won’t need permission to have a pet or to paint the home red.
Buying a home can be a rewarding experience but it is not always the best decision. If you do your homework and decide home ownership is right for you, be careful about your purchase as it will be one of the biggest financial decisions you will make in your lifetime. If you decide not to buy, enjoy being a renter and make sure to invest in other appreciating assets.