Buy VS Rent

The question whether to buy or rent is answered only by asking yourself a few key questions. Here are some commonly asked questions and answers that hopefully make your ability to decipher if now is the right time to buy a little easier.

Q. How much more will owning cost me?

A. Renting doesn’t always cost less and in many cases, with today’s interest rates, costs more than owning your own home.

Here is a quick example cost breakdown on owning v. renting using a rate of 5% for the mortgage

OWN ($100,000 Mtg @5%.) RENT
Payment w/MIP $611.82 $1,200
Taxes and Insurance $325.00 $25.00
Home Maintenance $50.00 $0
Home Repairs $100.00 $0
Total Est. Monthly Costs Associated $1,086.82 $1,225.00
Tax Advantage Yearly Write-off $5900.00 $0

*est. is for a $100,000 mortgage on a home v. renting a comparable home or apartment

Q. Will I qualify for a new home?

A. To qualify for a new home purchase these following credentials are essential; 640 FICO score, 45% Debt to Income Ratio, 3.5% assets for home down payment, no bankruptcies or foreclosures past 4 years. If you meet all of the above requirements, you have a very strong chance of being approved for a home loan (these requirements are for a FHA Loan)

Q. Is my income stable enough to sustain a new home purchase or do I see any upcoming foreseeable income shrinkage?

A. When loan officers approve you for a new home the allowable debt to income ratio is 45% of your gross income. This means that they divide your total liabilities that report on your credit and your future proposed housing expenses (principal, interest, taxes, and insurance) by 45% of your total pre-tax income. This calculation takes into account yours and your spouse’s income. So, if you think that your income will be at all diminished in the near future, you may want or have to rethink your new home purchase. In this case, it may be best for you to buy less of a home or to possibly rent until you can get a better grasp of your financial situation.

Q. Do I have enough assets to help me thru a financial hardship?

A. It is highly recommended for prospective home buyers to have 6 months of reserves set aside in a savings account for future unforeseeable financial hardships

Q. Do I want to stay in this area for at least the next 7 years?

A. If you are not sure you want to stay in the area you are planning to buy a home in for job, family or personal reasons, it may be best for you to rent as buying and selling a primary residence can be a physically and emotionally tiring task.

Q. When will property values be stable again?

A. This is the million dollar question that can’t be honestly answered and is a question mired in a myriad of responses. Housing graphs can be posted and financial and housing advisors opinions can be published but the only certainty in the housing market is the uncertainty of its future. The truth is that home values will continue to depreciate and appreciate over time and that the housing market is a cyclical market. Since the giant housing bubble has burst, realistic home prices have emerged. Chances are that if you buy a home in today’s market, its value will go up and down like everything else financial, but today you will not be buying your home at an extremely over-inflated price (a la 2006).

These questions and the answers to them will help you solve your buy or rent dilemma but only you really know, after you learn to ask the right questions, whether you can truly afford a new home purchase.

If you have any additional questions you would like answered in regards to buying v. renting, please contact Randy Gammo.

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