First Time Home Buyer

Rent or Buy? The Pros and Cons

One of the best reasons to consider owning a home is that stock market changes have no affect on fixed mortgage payments. Rent can change when the lease term ends. Even worse, renters must contend with rules determined by the landlord which include noise restrictions, limits on decor, use, care and owning pets. It can seem like an occupant walks on eggshells between conforming to landlord’s rules and expectations, and in some cases, homeowner’s associations.

Homeowners, on the other hand, are free to make any changes to the property without asking permission. You can have pets without paying pet rent, deposits or fees. A home is an appreciating investment with the added perk of providing a place to live and enjoy. The experience of owning a home benefits homeowners with a sense of freedom and privacy.

Tax Benefits

Mortgage interest and property tax can lower homeowner’s income tax burden when filing taxes each year. Building and improvement costs associated with owning a home may be deductible. Loan discount points may be included in the deduction. The benefits of itemizing your tax deductions further reduces tax obligations depending on your filing status.

Equity

A home builds equity over time, or with considerable improvement up to a maximum point which is determined by the market in the location of the home. The owner has the advantage to liquidate their asset for cash. The difference in the total mortgage balance and the current market value of the home is considered equity. Many people choose to borrow against the equity that builds up, known as a home equity loan, to pay off bills, make improvements, pay for university costs, or leverage other investments. If the housing market is doing well, returns can be significant and realized rather quickly on the right investment.

Selling too quickly, or trading real estate investments can get really expensive, not to mention stressful. It is a large transaction and you may not recoup the costs, especially if you choose not to live in the house very long before selling. It is near impossible to build enough home equity to match the expense of real estate commissions and other costs associated with real estate transactions. House flipping looks easy on TV. Just remember, they have the benefit of turning the cameras off when things get too difficult.

The Costs of Home Ownership

The idea of purchasing a home or investment property can be really romantic in your head. Reality sometimes dictates differently. A home purchase can be more of an emotional result rather than a sound financial decision. Knowing what it will cost you before finding the home dreams are made of is often the best route to take. Mortgage payments alone only begin to scratch the surface of the expenses associated with owning and maintaining a home.

The initial cost of a home purchase includes the required down payment ranging between ten and twenty percent of the purchase price. There are inspection fees and closing costs to consider along with any upgrades or improvements you may decide to make before moving in. Property taxes, home owner’s insurance and utilities can be a daunting expenses in comparison to renting, say, an apartment.

Neighborhood Homeowners Associations pose another unintended expense requiring an annual and/or monthly fees collected to maintain streets, that cute little park for the kids to play, and any other common areas. These costs must be factored into the overall expense of owning a home. Home maintenance such as plumbing, or heating and cooling issues, not to mention the time and energy, or expense of landscaping and lawn care are additional costs most buyers don’t consider.

The Decision to Purchase a Home

In the US and some other developed countries many people are fortunate enough to be able to choose the type of lifestyle they would like to lead. Home ownership, to some, constitutes the fulfillment of a dream, others prefer flexibility in their life. Those who prefer owning instead of renting will soon find buying a home is likely the largest investment they will ever make. It is important to recognize the demands of home ownership before committing to any purchase.

The best approach is for potential buyers to thoroughly examine their own finances and spending habits, research the market, and seriously contemplate the realities of home ownership. Advance planners are better equipped to make this weighty decision. If people considering a purchase of this magnitude determine the goal of achieving this dream is within reach and understand the implications of this long-term commitment, they stand to benefit significantly.

Owning a home can help smart investors to build wealth. Advance preparation will help to make the transaction progress smoothly. Affordability of a home purchase is the first measure of a person making their hard earned money count in their favor. A great real estate broker can offer professional assistance helping you through each step of the process, maximize your investment and ensure all questions and concerns are addressed before finalizing the transaction.

Before You Apply for a Loan

A prospective homeowner must determine if they qualify for a mortgage of a median-priced home. The formula is a monthly gross income equal to the monthly payment multiplied by four. That means the monthly payment should not exceed twenty-five percent of the buyer’s gross monthly income. Review of your W-2 tax form and your recent tax return will help determine your annual gross and net income. It would be wise to begin a file for to reference when you are ready to secure a loan.

The mortgage rate will also determine if home ownership is affordable. This rate can be found in the monthly report by the Federal Housing Finance Board. The rate regulates the terms and knowing it will allow you to calculate the additional cost associated with borrowing the money. Fees and interest rates associated with applying and carrying a mortgage must be considered when deciding if qualification and loan service is feasible.

The calculator below will estimate the size of a home mortgage loan you can afford to borrow based on the size of your current monthly rent payment.

Note: The calculator assumes the property tax, insurance and maintenance expenses will be offset by the appreciation of the value of your home. This could change depending on market conditions and timing as real estate prices change due to a wide array of local factors and broader macro-economic impacts like changes in mortgage rates.

Credit Score and Loan Approval

As you might suspect, you will need good credit to make a purchase of this magnitude. Lenders want to know their investment is not above a normal range of risk. It’s funny, many individuals never show too much concern over their credit until they need a loan. You don’t want to be surprised by low scores when you apply, so do your homework! It shouldn’t be a stretch to imagine the best interest rates are reserved for consumers maintaining the best credit.

The Experian, Transunion and Equifax are the three top credit reporting agencies. Each traces and tabulates credit transactions by each individual consumer to formulate a score based on their credit conduct. FICO credit scores above 700 are considered good, but each lender has their own criteria that must be met to receive loan approval.

Use the government address below to find out how to get a FREE annual credit report to check your status every 12 months.

https://www.consumer.ftc.gov/articles/0155-free-credit-reports

It could take months, or even years to unravel some hairy credit problems. Prospective buyers may need to work on improving their credit scores way before they consider a home purchase. Though it may be possible to repair some credit problems if borrowers are aware of it early enough in the home buying process, escrow is not the time to tackle a potential deal killing issue. Ideally, verifying your credit rating well in advance permits you the time to rebuild your credit before submitting a loan application.

Here is information to credit counseling agencies recommended by the State of Oregon in case you need additional assistance: Cricket Debt Counseling – 219 SW Stark Street, Suite 200, Portland, OR 97204 (503)353-0400 or (866)719-0400.

Financial Requirements to Consider

It is advisable to evaluate all personal finances to figure out how much money is available for a down payment. You should calculate a twenty percent down payment in consideration of the purchase price. The majority of lenders require a heftier down payment to offer better loan terms and a lower interest rate.

A more substantial down payment means buyers can avoid paying private mortgage insurance (PMI). Extra funds will be needed to cover appraisal costs, closing costs and required reserves as determined by the lender. With an early education and advance preparation, the process can be anticipated and planned out masterfully.

If you would like to have a conversation with an experienced person in the real estate business, I am happy to meet with you to help you decide if home ownership is a good choice for you.

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