With the real estate market and job market strong, many renters are starting to think about making the transition from renter to owner. But... which is actually better financially? While simple rental cost vs. mortgage cost comparisons can be very attractive, buying a home is a serious commitment, and there are many underlying factors to consider. Here are some important questions to ask yourself before buying your first home.
How long do I plan to live in the home?
A few years or less
Selling a home costs money. If you could potentially have to move in the short term, the value of your home may not have appreciated enough to cover the costs of buying and selling. In this case, it might be better to continue renting until you've got a more permanent living situation.
5 years or more
The length of time it will take to cover the costs of buying and selling a home depends on various factors. Average appreciation tends to sit at around 5% per year. In this case, you should plan to stay in your home at least 3–4 years to cover buying and selling costs. The real estate market can be particularly volatile, however, and dramatic swings up and down are not uncommon.
For how long will a home meet my needs?
A few years or less
If you anticipate that the features you need or want from a home will change significantly over the next 1 to 5 years (marriage, divorce, kids, in-laws), you might want to keep renting for a few more years as you assess your changing needs... or consider purchasing a home with plenty of room to grow into.
5 years or more
Don't foresee any major life changes in the near future that might change your home needs? If your situation seems to be fairly stable, then buying a home might be a better option. People tend to remain in homes longer than they initially intend, primarily due to the work and expense associated with moving. You might still consider buying a home with potential for growth (an extra bedroom, a basement or attic that could be finished).
How financially healthy and stable am I?
Somewhat shaky or uncertain
If your credit score is lower than ideal, your debts are high, your income is low or uncertain, or if you just started a new career or plan to change careers, then buying a home might not be the right move just yet. Not only could it potentially be difficult to find a lender, you might also end up paying more thanks to higher interest rates or Private Mortgage Insurance requirements. Plus, job uncertainty could spell trouble for the payment of your future mortgage payments.
Very stable, predictable
If your financial situation feels pretty healthy (you have fairly good credit and low debts), your job is stable (you've been with the same company for a while and plan to stay for years to come), and you've got some savings or investments to put towards your home, then you might be in the right place to start considering home ownership. Remember, buying a home costs money—but owning a home does, too.
How much am I comfortable paying?
No more than what I currently pay
How much of your income are you spending on your monthly rent payments? If your rent is taking up a good chunk of your monthly income, it might not be wise to buy a home just yet. Though mortgage payments may be comparable to rental payments, it's important to remember that home ownership comes with many additional costs—like insurance, maintenance, repairs, landscaping, potential HOA fees, and more.
I've got some wiggle room
If you're paying only a small portion of your monthly income on rent and could easily spend more, then you might be in a position to buy. Remember, owning a home costs more that simply the cost of buying it (think: regular maintenance, repairs, emergencies, etc) so it's always a good idea to keep some wiggle room in your monthly budget and not stretch your payments to the max.
How much loan do I actually qualify for?
A lot less than I thought!
There are a lot of loan options out there today, which offer a lot of possibilities for home buyers with lower credit, income, or savings. But just because you CAN qualify for a loan, doesn't mean it's a good idea to accept the terms of that loan. You might not qualify for enough money to purchase the home you really want, or end up paying too much in interest or mortgage insurance. In this case, it might be better to wait and improve your financial situation before attempting to buy.
More than I estimated!
In this case, you might start to consider how much you should spend on a home. Some say that you should refrain from borrowing as much as you qualify for because it's wiser not to stretch your financial boundaries. The other school of thought is that you should stretch to buy as much home as you can afford, because with regular pay raises and increased earning potential, the big payment today will seem like less of a payment tomorrow. However, you should always buy within your comfort zone.
Where will the money for the buying transaction come from?
I'm not sure...
Don't have the savings for the traditional 20% down payment and the additional 2% – 5% closing costs? Actually, it's not that big a deal and won't necessarily exclude you from owning a home. FHA loans require as little as a 3.5% down payment, and VA loans offer as little as 0% down. Rural development loans are also 0% down—and every area of Washtenaw County qualifies for a RDL except for the City of Ann Arbor and the City of Ypsilanti.
I've got savings
If your credit is good and you've managed to save about 10% – 20% for a down payment, you will likely appear to be a very good financial risk to a lender and will qualify for a conventional mortgage. However, if you're a first-time buyer or an active or veteran service member, you may also qualify for additional loan options, so be sure to discuss all your options with your lender.
Do I have money for other costs associated with home ownership (foreseeable and otherwise)?
I'm stretched pretty tight...
If the thought of shelling out a few hundred or thousand dollars on home updates or repairs has you scrabbling to invent new ways of making money, then it might not be the wisest time to invest in a home.
I've got an emergency fund
If you've got some money set aside for everything from the little costs (HOA fees, paying the neighborhood kids to rake the yard, buying a lawnmower) to the big scary ones (the roof is leaking!), then you might be in a good place to consider buying.
Still Have Questions About Buying a Home in Washtenaw County?
If you are still unsure if you should buy a home after making these considerations, you may want to consult with an accountant or financial planner to help you assess how a home purchase fits into your overall financial goals. Talk with a local Realtor to learn more about the specifics of buying a home in Washtenaw County.
Want to learn more about buying a home around Ann Arbor? We've got plenty of tools and resources to help you explore the area, learn the ins and outs of buying a home, and even start searching homes for sale. And if you'd like to speak with us about buying a home in Washtenaw County, please feel free to contact us!