Rent vs Own Doesn’t Address All Buyer Concerns
The “rent vs own” argument doesn’t even begin to address the questions that first time home buyers have.
There is more to buying a home than simply comparing what you pay for rent to what the monthly payment will be if you own. There are other costs involved.
When the market gets slow, Real Estate Agents and Mortgage Lenders start the marketing machine to try to get home buyers “off the fence”.
One of the most popular of these marketing messages is Rent vs Own, which delivers a compelling message for sure.
I have noticed a lot more marketing materials and advertisements in the past few months that focus on the age old message of “Is it better to Rent or to Own?”.
Know The Benefits of Rent vs Own
It’s not that the Rent vs Own argument isn’t a good one, I am just not sure that most informed consumers aren’t already familiar with the math and tax benefits.
It’s important to understand the investment and tax benefits of homeownership, which extends far beyond a simple rent payment vs mortgage payment comparison.
Tax Benefits of Home Ownership
I’m not going to bore you with a bunch of math, the tax benefits of owning is a great question for your CPA, Accountant or tax preparer.
Most Rent vs Own approaches to home ownership will calculate your post tax savings vs the rent you pay now. It’s an accurate statement that a mortgage payment can be less (after tax write off) than paying rent, but you’ll be spending more money every month in many cases.
Do Not Try This At Home
This does not mean that home ownership is not better than Renting, it simply means that the the sales person will typically not compare apples to apples, but an apple to an apple pie, the American Dream. Hit the emotion bone.
Now in reality, with a competent tax professional at your disposal, the tax benefits of ownership can either be postponed until tax filing time, or backed out of your payroll withholdings, resulting in you taking home more of your money each month.
The latter method is much riskier and more prone to error or mis-calculation, resulting in the possibility of owing taxes at the end of the year. Please consult a professional tax preparer before changing your payroll withholdings.
Investing In Equity
In terms of a favorable market and equity upside potential, this is a very good time to buy. Property values are a potpourri of rising, falling and everything in between, all over the Country.
Home values are rising in most areas, and will continue to be on the rise, barring any major economic events, including too quick a rise of interest rates, making lending less affordable and moving the dream of ownership out of many folk’s reach.
If you are thinking of becoming a homeowner, Congratulations! Interest rates are uncharacteristically low, and there are many great programs to help you with what I believe to be the true reason why more people don’t buy right now.
The Cost of Home Ownership
Comparing a mortgage payment to a rent payment is an easy thing to look smart doing
Reality kicks in after calculating the upfront investment, and it will not take you long to figure out that the upfront cost of ownership is a far bigger hurdle to leap than a few bucks and some tax savings.
Most Common Down Payment Requirements
Most loans will allow any amount of down payment beyond the minimum required, let’s take a look at the bare minimum each loan type requires so we can establish a baseline for our minimum investment for ownership.
- 3.5% – FHA Insured Mortgage
- 5% – Conventional Mortgage
- 0% VA Guaranteed Mortgage
Don’t Get Caught By Closing Costs
Closing costs always seem to sneak up on people, catching you by surprise once you start calculating the true cost of buying a home.
As a rule of thumb, I recommend you calculate between 3% and 4% of the purchase price as the closing costs portion of the purchase.
When added to the down payment requirement, most buyers trying to buy on a budget are already in to the tune of 6.5% on the low end, to 9% of the purchase price on the high (minimum investment) end.
Covering Downpayment and Closing Costs
There are several ways you can cover your closing costs, and even the down payment requirements using funds other than your own. Let’s take a look a few ways to cover these costs:
- Seller Concessions – Credit given by seller at closing, to cover closing costs only
- Agent Credit – Credit given by Agent at closing, to cover closing costs only
- Lender Credit – Credit given by Lender to be used toward the cost of Financing only
- Buyer Assistance Programs – Statewide, downpayment and closing cost assistance available
- Gift Funds – Can be received by a relative by blood or marriage and used for downpayment and closing costs