Renting Vs. Buying a Home

Scenario A renter starts out paying $800 per month with annual increases of 5%. A homeowner purchases a home for $110,000 and pays a monthly mortgage of $1,000 With the tax savings of homeownership, the homeowner's payment is less than the rental payment after 3 years. Source: http://www.realtor.org/field-guides/field-guide-to-buying-vs-renting

You should buy a house if… You have a secure job and income You plan to live in the house more than a few years You have enough money for a down payment You can afford the monthly payment (not to exceed 35% of your gross income) Source: http://www.cbsnews.com/news/why-renters-should-consider-buying-a-home/

4 Advantages of Buying a Home Building Equity – as you pay down what you owe and the value of the property increases, you earn equity. Equity is the value of the house minus what you owe. Savings on Taxes – On your taxes, you can deduct mortgage interest and property taxes. Improvements – As a homeowner, you can paint, landscape, and improve your home to your liking. The American Dream – pride of ownership

4 Disadvantages of Buying a Home Maintenance – You pay for all repairs Rising cost of: Insurance, HOA fees and property tax (property taxes vary by location) Selling – Having to sell if you move and paying for realtor fees and closing costs Liability – If something happens on your property, you could be sued for damages

4 Advantages of Renting Maintenance – The owner of the home/apartment pays for maintenance. Predictable Costs – You will know the exact cost of rent for the period of your lease. Flexibility – At the end of your lease, you can move easily without having to sell your home. Temporary – Over time, you can live in many different places without being tied down to a home.

4 Disadvantages of Renting No Tax Benefits – You cannot write off taxes and the interest on a mortgage No Equity: You did not benefit from the value of the house/apartment going up Rent Increases – Your rent could increase at the end of your lease. Not Permanent – At the end of your lease, the property owner may not renew it.

Equity Example You buy a house for $250,000. You put $25,000 down and take out a loan for the remaining $225,000. You make payments for 10 years which reduces the amount you owe the bank. You now owe the bank $160,000 instead of $225,000. The value of your house has risen to $375,000 in those same 10 years. $375,000 (the value of your house) -$160,000 (what you still owe the bank) $215,000 (your equity)

What is equity good for? Now you are married and expecting a child. The house you bought 10 years ago is not large enough for your growing family. You can now sell your house for $375,000. The realtor’s fees and closing costs add up to $30,000. $375,000 (the value of your house) $30,000 (realtor’s fees and closing costs) -$160,000 (what you still owe the bank) $185,000 (profit) You can take the profit from the sale of this house and use it as a down payment to purchase a larger house without raising your monthly mortgage payment!

Down Payments Typically 20% of purchase price though smaller down payment options may be available (i.e. 3% of purchase price) Example: You want to buy a house that costs $300,000. A 20% down payment would be $60,000. A 3% down payment would be $9,000.

Mortgage Payments Should not be any more than 28% of your gross (before tax) income. Example: You make $12.00 per hour working 40 hours per week which equals about $2,080 per month (gross). You can afford a monthly payment of $582 per month. Payments include principal, interest, property tax, homeowners insurance and PMI

Adjustable-Rate Mortgage 2 Common Mortgage Types Fixed-Rate Mortgage Adjustable-Rate Mortgage Interest rate cannot increase Payments are predictable Interest rates could go below your set rate Interest rate can increase or decrease Rates may be low for only an initial period Monthly payments may initially be lower than fixed-rate loans, but can increase significantly

Mortgage Terms 15-Year Mortgage 30-Year Mortgage Borrow less money because of larger monthly payments Build equity faster Less interest to pay Lower interest rate Borrow more money because of lower monthly payments Build equity more slowly Can deduct more interest from income tax Higher interest rate

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