Reprinted with permission from Freddie Mac.
Rent vs. Buy
WHAT YOU’LL LEARN
• Homeownership is a financial commitment, pre-and post-purchase
• Buying may make sense if you plan to stay in your home for at least five to seven years
• The math behind renting vs. buying
Buying a home is a big financial investment – perhaps the biggest one you’ll make in your life. Be sure to do your homework and carefully evaluate how you want to live and how much you can comfortably afford.
Homeownership can be very rewarding if you are properly prepared, know what to expect and make informed financial decisions.
Is buying a home right for you? It may make sense if you:
• Have reliable income, good credit, and documentation to verify your savings.
• Can afford at least a 3% down payment and related closing costs.
• Want a chance to build equity and be eligible for homeowner tax breaks and credits.
• Have the time and money required for home maintenance and improvement projects.
• Have an adequate cash reserve to withstand a loss of job, illness, or other financial setbacks.
• Are planning on staying in your home for at least five years.
Rent vs. Buy: Crunching the Numbers
The costs of renting or buying are varied, making it hard to tell which makes better financial sense. Use our Rent vs. Buy calculator to evaluate the costs as illustrated for Sally and Darren in the example below.
Sally and Darren want to know if it makes better financial sense to rent or buy given their current $1,400 rent payment. How much home can they buy knowing they can afford a $1,400 monthly mortgage payment and can make a 5% down payment?
THE SCENARIOS
RENTAL SCENARIO
Monthly rent = $1,400
Monthly renter’s insurance = $10
Annual rent increase = 3.6%
HOME -OWNERSHIP SCENARIO*
Purchase price = $200,000
Down payment = 5% ($10,000)
Annual property tax = $2,000
Annual homeowners insurance = $500
Annual home maintenance = $2,000
Mortgage rate = 4.5%
* These inputs will result in a monthly mortgage payment around $1,400 when factoring in PMI
We’ve also put in other assumptions and costs for Sally and Darren, including: a 3% home appreciation rate, a $1,500 origination charge, $1,000 for settlement services, 3% for selling costs, a 33.8% state and federal tax rate, and a savings rate of zero.
The Outcome
With this scenario, Sally and Darren will save $92,216 by buying instead of renting over a seven year period. If they stay in their home for 15 years, they will save $273,558. Over 30 years, they’ll save $887,450.
Armed with this knowledge, Sally and Darren are better prepared to answer the rent vs. buy question.
KEY TAKEAWAYS
1. Homeownership is a long-term financial commitment.
2. Comparing the financial differences between renting and buying is complex. Use our calculator.
3. Long-term, Sally and Darren would benefit financially from homeownership.
Understanding the Responsibilities of Homeownership
WHAT YOU’LL LEARN
• A mortgage is a serious commitment, a binding contract between you and your lender
• It’s important that you pay your mortgage on time, every month.
While shopping for your home is fun and exciting, it’s important to remember the responsibilities and financial commitments you’ll have as a homeowner. Saving for your down payment and signing on the dotted line are simply the first steps to homeownership.
As a homeowner, you’ll be responsible for:
• Making your mortgage payment in full and on time every month. This was your commitment to your lender when you completed your closing documents.
• Home repairs and maintenance costs. Your home needs routine TLC, from mowing the lawn and painting the windowsills to larger projects such as roof replacements and plumbing repairs.
• Other housing-related costs. These include homeowner association dues (if applicable), homeowner insurance premiums, and property taxes.
KEY TAKEAWAYS
1. As a homeowner, the down payment to purchase your home is just the start of your ownership responsibilities.
2. Homeownership requires a commitment to pay your mortgage, property taxes, homeowner association dues (if applicable), and other costs associated with home care.
Pros & Cons of Homeownership
WHAT YOU’LL LEARN
• Owning a home is a long-term commitment of time and money
• Homeownership may allow you to take advantage of tax benefits
• With a 30-year fixed-rate mortgage, your monthly payments will be stable for the life of the loan
Owning your home is considered the American Dream by many, and here’s why:
• You can take pride of ownership. You’ll have a place that is uniquely “yours” that you can customize – from paint colors to major remodeling projects.
• You may have some tax benefits. You may be able to deduct the interest on your mortgage and property taxes. These tax savings may offset a portion of the cost of owning your home.
• Your monthly payments will remain stable. With fixed-rate mortgages, your monthly principal and interest payments will stay the same for the entire period of the loan. This will make it easier to plan and budget – whereas rental rates may rise over time.
• You have the opportunity to create equity and enjoy stability. Owning your own home may be a great way to create equity for the future and provide stability and security for you and your family.
Overall, buying a home can be a good investment, but you need to remember you will become your own landlord. You are now responsible for the maintenance and upkeep of your home and property. This means that:
• You’re responsible for all maintenance costs, from small plumbing problems to major – and costly – issues such as roof replacement and water pipe repair.
• You’ll have to budget for all home-related costs, including utilities, homeowner association dues (if applicable), homeowner insurance premiums, and property taxes.
• You’ll have to pay your mortgage and all other bills on time. Paying not only your mortgage, but all your bills on time helps you build and maintain good credit. This is essential if you want to borrow again in the future for home renovations, a new car, or student loans.
Due to unforeseen circumstances, there is also a chance that risks may arise:
• You may need to sell your home quickly. Depending on the local real estate market, you might not be able to sell your home quickly, or for the price you seek, and you’ll still be responsible for the mortgage.
• Your property value could depreciate. Your home can lose value for a number of reasons, such as economic conditions, your home not being kept up, or a drop in neighborhood home values. You may want to ask your lender if they provide down payment insurance coverage to help protect you from risk of loss.
Be sure to weigh these potential benefits and risks carefully before you start your search.
KEY TAKEAWAYS
1. Homeownership can offer financial security and stability.
2. There are no landlords with homeownership. Be sure you have the time and money to care for your property.
3. You will damage your credit if don’t pay your mortgage on time.
Re-entering the Market
WHAT YOU’LL LEARN
• If you lost your home due to a short sale or foreclosure, you can become a homeowner again
• You can rebuild your credit in as little as three years and up to seven.
• It will be more difficult and more expensive to buy again before the short sale or foreclose is removed from your credit report
If you lost your home to a foreclosure, short sale, or deed-in-lieu and want to be a homeowner again, the good news is you can. In as little as two years, and up to seven years, from the time you lost your home, you can rebuild your credit and qualify for a new loan.
Did you know that boomerang buyers, those who lost their home during the crisis, are back in the market? In fact, it’s estimated that 7.3 million buyers will return to the market over the next eight years.
Once the foreclosure, short sale, or deed-in-lieu has been removed from your credit report – as specified by the Fair Credit Reporting Act – the same guiding principles for all homebuyers apply to you.
Homeownership may be right for you if:
• You expect to live in the house for at least five years.
• Your monthly payment comfortably fits your budget.
• You have adequate reserves for unexpected emergencies.
If you are looking to buy before the foreclosure or short sale is removed from your credit report, there may be some differences for you, including:
• Your mortgage lender will pay close attention to your credit, looking carefully to determine your ability to repay your mortgage. The better your credit score, the better your chances of getting approved for a loan.
• Your lender may request that you put down a bigger down payment.
• Your lender may offer you a higher mortgage rate than the average rate.
KEY TAKEAWAYS
1. If you lost your home due to a short sale or foreclosure, you can rebuild your credit and become a homeowner again
2. Many who lost their home during the housing crisis in 2008-2012 are returning to the market
3. The Fair Credit Reporting Laws determine how long the short sale or foreclosure will remain on your credit report.
