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4 reasons to buy a home instead of renting
The financial benefits of buying a home compared with renting have yoyoed over the years, especially of late. If you’re sitting on the fence, here are four circumstances in which it may be a better bet to buy.
If interest rates remain low
From a financing perspective, if this isn’t the best time to buy a house, it’s pretty darn close.
The average interest rate on a 30-year fixed mortgage, the most common variety, has hovered below or near 4% for several months now. For comparison’s sake, if you bought 10 years ago, the average interest rate was 6.41%. In 1996, it was 7.81%, and in 1981 it was a whopping 16.63%.
Although the Federal Reserve has begun to inch rates upward, it is likely that it will do so slowly and that it will be a while before the cost of borrowing to buy a home stops being historically low.
If home prices level off
Home prices rose steadily in the 1970s, ’80s, ’90s and 2000s before plunging around 2007, and in the past few years they have been climbing again. Different markets have seen different trends, of course, but generally what’s at play is supply and demand: More potential buyers than houses available means sellers can dictate terms and get top dollar.
But something interesting is happening: The oft-told story that millennials are renting for longer or living with their parents nowadays is not entirely accurate. No, people in this age group (born between 1981 and 1997) want very much to own a home, but they are putting it off because of real and imagined difficulties in affording it.
That could mean fewer potential buyers and a cooling of the upward surge in home prices. While others wait, you could pounce.
If rental costs continue rising
Real estate researcher Reis Inc. reports that apartment rents rose 4.6% in 2015. In hot housing markets such as California and the Pacific Northwest, rents are going up by about 14% per year. According to Zillow, the median asking price nationwide for a rental was $1,575 per month in early 2016.
The monthly payment on a $200,000 mortgage — about the average in the U.S. — with a 4% interest rate would be just over $950. Even with taxes, insurance and maintenance, it’s tough to make a financial case in favor of renting.
If you want to save money
Home values over the past 70 years have generally tracked with inflation. Yes, you could make more money in the stock market. But we’re talking real life, not investment advice. Consider two things:
- Your rent is locked in for a year or two, then will go up. Your mortgage payment can be the same for 30 years.
- If you are raising a family, it seems all but impossible to save money. But when you sell the house after 30 years (or 20 or 10), someone will hand you hundreds of thousands of dollars, money that could put the kids through college or finance your retirement.
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Buying a home? Budget for more than just mortgage costs
Buying a home is one of the most important purchases you’ll make in your lifetime so it’s important to make sure you set realistic expectations about how it will affect your monthly budget. Your mortgage payment will make the largest impact, but there are additional costs you should consider before signing on the dotted line.
Bigger house, bigger bills
Chances are you’re living in an apartment or smaller accommodations before purchasing your new home. You probably have a good idea of the types of expenses you’ll incur, but with more square footage, expect those expenses to increase, like heating and air conditioning and gas and electricity. Will you have a luscious green lawn that needs watering? Count on a higher water bill, too. And if you’re looking forward to a second TV in your new man cave then even your cable bill will be bigger!
In the south, a termite bond is often needed. Pest control is recommended quarterly. You may pay homeowner association fees if you live in a subdivision or condominium, plus homeowner’s insurance and higher property taxes. You should also set aside a little cash each month for repairs and maintenance.
When you close on your home, you’ll also have to pay the moving company. Obviously not a monthly cost, but it could be a hefty one that you should consider. There’s also the cost of furniture or appliances that you’ll need…a refrigerator, washer, and dryer, lawnmower, or anything else you’ll need relatively soon. Will you use credit to purchase these items? They can easily turn into monthly expenses by way of a credit card bill, so be sure to account for those payments, too.
Knowing is the key
This list of expenses is not meant to deter you from home ownership. People manage their expenses every day living in their dream homes—and you can, too. If you are aware of the additional expenses you can make the necessary adjustments. Maybe you prioritize some other purchases or even consider a smaller sized home so financially you can live more comfortably within your budget.
Knowing what you can afford is the first step in making a smart, educated decision. By tallying up your monthly expenses along with your mortgage payment before you make a purchase, you’ll be better prepared for happily ever after in your new home.
“I spent $50,000 on home improvements but my home’s appraised value only increased by $35,000?”
If you’ve been in the mortgage business, you’ve had to address or handle a question like the one above. As a capitalist society in the United States, we all want to see a return on investment! As a homeowner, when you do a home improvement you will increase the value of your home, however, it’s not typically dollar for dollar. So, spending $50k on finishing your basement, doesn’t increase your home’s value by $50k. Unless you are completing an above grade addition to your home, historical data supports that you’ll receive approximately 70% return on investment. Some items, such as landscaping and fences, return far less than 70%.
The key to home improvements is simple, do it for your enjoyment and not for a resale value. Remember, it’s called “HOME” improvements and not “HOUSE” improvements. It’s your HOME. The improvements you’re doing are for you/your family.
So, when you’re thinking about investing in your home, consider it to be investing in your level of enjoyment from your home and not just in the value. If you do that, you’ll always feel good about it!
What it means to have a “friend in the industry”
“I have a friend in the industry.”
It’s safe to say that in the world of mortgage, we have all heard this one before. When someone broadcasts this to you, the real question is, “What does having a friend in the industry mean?” It could mean, “A realtor lives down the street from me.” It could mean, “My son’s basketball coach is an appraiser.” Or it could even mean, “I know someone at church who works for the bank.”
We all have “friends” in the industry – not just the mortgage industry either, but in many industries. And working in the industry doesn’t make them all experts. Having a friend in the industry and having a trusted advisor to help you determine your mortgage options are two completely different things. Just because you have that “friend” in the industry, it doesn’t mean that you’ve shared your financial situation with them. Most people tend to keep their private business…well, private. However, by having a relationship with someone who is a trusted advisor, and who puts your interests above all else, that’s really having a friend in the industry.
If you’re looking for a “friend in the industry”, let us know because we are here to help!
Todd’s Mortgage Minute: “How are rates?” Hmmm…
I’ve been in lending for almost 20 years and a question I receive from friends, family, and acquaintances alike is often the same, “how are the rates?” Well, this all depends on many factors, but it is mostly dependent on what YOUR situation is and what YOU’RE trying to accomplish.
You’d have to have lived under a rock the last couple of years not to know how low rates have been — and not just low, but HISTORICALLY LOW. But, over the last three months, it’s been well publicized that “rates are going up”…again, from a historical low. Just because rates are rising doesn’t mean they’re high, it just means they’re higher in some capacity than what they were yesterday. Not to mention many factors go into determining the rates, as well: credit scores, loan to value, type of occupancy, length of loan term, etc.
So consider this: if you’re trying to purchase a new home and you’ve found the house of your dreams AND it’s in your budget, then the rates should be good for you! Or, if you’re looking to refinance your current mortgage to save money each month by securing a lower payment and rate, then the rates should be good for you, too!
Remember, none of us in the industry can tell or predict what the rates will be tomorrow or anytime in the future, we can only share what they are today, and if it meets your needs and is better than what you have, I would say the rates are good!
Todd’s Mortgage Minute: Pre-Qualification vs Pre-Approval. What’s the difference?
Purchasing a home is one of the most important and stressful events you’ll experience in your lifetime. It’s also one of the most exciting. Homeownership offers financial benefits like tax savings and wealth building, but it also offers some social benefits. Homeowners have a stronger sense of belonging and some even say it helps to build a stronger family unit. If you’re ready to take the leap, you’ll need to know exactly where to start.
What’s the difference between pre-qualification and pre-approval?
Although they may sound similar, there is a distinct difference between pre-qualification and pre-approval. Based on a buyer’s credit rating and the amount of income he has verbally communicated to the mortgage lender, a buyer can be pre-qualified for a specific home-buying dollar amount. It is not, however, based on any official verification of income and is not a guarantee of loan approval.
Pre-approval is based on a buyer’s credit rating and submission of an official loan application. When the buyer is pre-approved, his application, which includes documented income and asset information, has already been submitted and reviewed by the underwriter and is a step closer to final approval.
Do you need one vs. the other?
Most real estate agents make it their standard practice to require their clients to be pre-qualified before they begin showing homes. While it can be an anxious and exciting time searching for your dream home, it can also be a stressful time for the seller. Requiring pre-qualification for potential buyers ensures the agent and the seller that the buyers are serious, are ready to move forward, and are respectful of everyone’s time and efforts.
Conversely, having pre-approval prior to viewing any homes is not necessary, nor is it common practice. It could, however, demonstrate a stronger commitment, especially upon submission of an offer. After all, the pre-approval step is substantially farther along in the loan approval process than pre-qualification and could potentially shorten the time it will take to close the loan.
When do you need pre-approval?
When a buyer submits a purchase offer, it will typically include a finance contingency. The finance contingency will identify the number of days in which the buyer must obtain loan pre-approval from the mortgage lender. Typically, the number of days is fifteen, however, it can be any number that the seller and buyer agree upon. During this time, it is critical that the buyer submits a loan application and any supporting documentation to the mortgage lender on a timely basis. By satisfying the contingency and supplying a pre-approval letter, the seller gains a stronger sense of confidence that their buyer’s financials qualify them to purchase the home and that the loan will close.
If you’re in the market to purchase a home, your first step should be to meet with a qualified, reputable mortgage lender to review your financial health, discuss your budget, and obtain a pre-qualification letter. Then, start gathering your supporting documentation so that when you find your dream home, your loan pre-approval will be a smooth and simple process.