With rents rapidly increasing in many areas, now is a good to think about whether it makes more sense to buy or rent your home. A recent study by Zillow reported that the median rents in many areas are increasing at a rate higher than inflation. The highest increase was San Francisco where the median rent grew year over year by 15% in January 2015!
The mortgage industry has also started easing credit so folks can get a loan with a smaller down payment – as low as 5%. Plus interest rates continue to be near historic lows. Taken together buying a home is starting to become more financially feasible for many people.
So how do you know if buying a house is the right move for you?
One: Ongoing Costs of Buying a Home
The first thing to consider is how your monthly and yearly costs will change if you buy a home. Not only will you have mortgage payments, but you’ll also have to consider property taxes, home owner’s insurance, utility bills that may currently be covered by your landlord (water, garbage, etc.), ongoing repairs and maintenance, and possibly PMI insurance if your down payment is less than 20 percent.
Zillow has a helpful calculator that estimates your mortgage payment, home owner’s insurance, property taxes, and PMI insurance to get an idea of how costs will increase with a home. Don’t forget to include increased utilities plus repairs and maintenance to come up with a more realistic total.
Although your expenses may rise when buying a home, so will your take-home income. If you itemize deductions and file a Schedule A with your tax returns (which you’ll probably do once you buy a home), you’ll be able to deduct the interest part of your mortgage payments and property taxes from you income.
For example a 30-year mortgage for $400,000 at 4% will have interest payments of $17,855 the first year of the loan. The property taxes may be another $7,200 a year. That’s a total of $25,055 that can be included on with your itemized deductions. This amount is deducted from your income before calculating taxes.
Two: How Long You Stay
You’ll also want to consider how long you’ll be living in the house. In general, the longer you stay, the more profitable it is to buy instead of rent.
- There are upfront costs each time you buy and sell – broker fees, county taxes, appraisal fees, and title insurance that can run 2 to 3% of the price of the house. You’ll want to stay a few years to make the upfront fees worth the price.
- The longer you stay in the house, the longer it has time to appreciate. The real estate market can have some bumpy years but generally it’s an upward trend as long as you have enough time to ride it out.
- A main benefit of owning a home instead of renting is you are building up equity. The longer you stay, the more time you have to build up this equity by paying your mortgage each month.
- With a fixed mortgage your living costs stay the same, unlike rent that tends to increase each year. This can have a nice impact on your budget a few years down the road as inflation continues to increase the rents in your neighborhood.
Three: Your Other Financial Goals
Finally consider how buying a house will affect your other financial goals. You’ll need a chunk of cash for the down payments and closing costs, and your monthly expenses may also go up when you buy a home.
At the same time there are other goals competing for your savings and income such as paying down debt, putting aside money for an emergency fund, and contributing to your retirement fund. Buying a home will be a lot less stressful if you can continue making strides towards reaching these goals as well.
One more tip – check out this calculator from the New York Times that helps you weigh all the pro and cons of buying versus renting.