The dream of owning a home is part of our American culture and a fantastic way to build wealth. However, when deciding which is better for you, timing plays a big role. If you think you will be in one location for less than 2 years, renting might be the best thing for you. However, if you plan to be in the same place longer than 2 years, purchasing can certainly be the way to go. Many of us start out in rentals in the early years of adulthood. We quickly learn that rent isn't cheap and owning our home allows us the ability to make it our own. So how do you know when you should buy?
If you know you plan on being in the same location for at least 2 years, you have a solid job, good credit scores of at least 640+ (some lenders will allow lower scores), have saved enough to make at least a 3.5% down payment and have enough to cover the upfront costs, such as earnest money, a home inspection, appraisal fee and option fee, you can probably move forward to purchase, especially if your realtor negotiates a great deal and can get the seller to help cover your closing costs.
Let me give you a little scenario*...
Let's use an average sales price around the Houston area of $250,000. Earnest money is typically 1% so that's $2500. This will be due to the title company when you find the house you love and the contract is accepted. Then you will give the seller a $200 option fee so you can do your inspections and if you want to terminate the contract for any reason within that option window, you can. Next up is the home inspection fee of $500 to the home inspector. He lets you know what you want the seller to address in repairs. Finally, once all that is complete and you're sure you want to move forward with the home, your lender orders the appraisal which is about $500.
So let's total that up...$2500+$200+$500+$500 = $3700 of upfront costs. About $2700 of that upfront cost IS A CREDIT to you at closing. If your down payment is 3.5%, that would be $8750. With your $2700 credit, that leaves $6050. If your realtor can negotiate your closing costs or you get an awesome mortgage deal with Keller Mortgage, or another preferred lender, you could end up buying a house of your own for about what it would likely cost you to rent again.
Let's break down the rent for a similar home....Monthly rent is likely $2400. The landlord will also want a $2400 deposit due when you sign the lease. They will also want you to pay application fees for each adult 18 or over which is likely around $100/couple. Then you have your pet deposits, which are running about $350-$500/per pet. So that total is about $5600 if you have a couple of pets and two adults going on the lease. This is for a one year lease and you could be doing this all over again a year from now if the landlord decides to sell the house.
And the crazy thing is that the mortgage for the home you could buy would likely be a lot less than paying rent. At the end of three years, you would have spent $86,400 on rent. That money would be gone. If you were to purchase that home, you would have invested that money, spent less annually, and would be building equity as the market values improve. If we just use a yearly return of 4% on investment, at 3 years that is $30,000 plus your $20,000 that you've paid down the mortgage and you're right side up $50,000. So you did not throw away all that money. In fact, you gained a good deal.
If you are on the fence about renting, a quick call to a lender and your realtor and you could determine if this is the right time for you to buy. The market is going to start heating up. If you have questions about if you should buy, sell, rent, or invest, give me a call. I would love to chat!
**this scenario is for explanation purposes only