The significant step from renting to owning a home requires careful planning and diligent saving. As a first-time homeowner, you can build equity in a home which increases your long-term wealth. When your original investment in the property increases, you stand to gain a stronger return from a future resale. Saving a down payment and completing a home purchase counts as a major life achievement for many of us. If you might want to buy a home in the next year, it helps to understand some of the factors that could affect your rent vs. own decision.
Location
Before you start your home search, evaluate the various pros and cons of renting vs. buying in your local area. Some cities or towns in the country offer more affordable options for homebuyers. If you live in a high-cost housing market, like Glendale, CA, or Miami, FL, it could take 12-15 years, according to RealtyHop. If you live in a more affordable city like Detroit, you could save for a down payment in a little over two years, which helps to speed up your home purchase timeline. Within each individual housing market, you can search for more affordable neighborhoods. As a buyer, you should analyze the trade-offs when seeking a home in your budget, such as living farther from the city center in return for a lower cost per square foot.
Your Future Plans
Buyers should have a thorough understanding of their career paths and family needs before making an offer on a home. Buyers looking to start or expand their family will need to consider more space, and buyers focusing on their careers may choose an area closer to work in exchange for the smaller size. Also, consider how long you wish to stay in your new home. Those who anticipate moving in the near future may have less strict requirements for their home than those who wish to settle down for many years.
Unfortunately, buyer’s remorse does exist and can happen for various reasons. You may realize that your commute takes too long, or the costs to keep up a new home may break your budget. In a robust real estate market, you might resell the home quickly, but home prices can shift for reasons beyond your control. After investing all the time and effort into attending open houses, price negotiations, and moving logistics, you should feel confident in your final buying decision.
Size of Home
Aside from considering your career trajectory, you should also take into account who will live in the home. If possible, you may want to buy the home you’ll need in the future rather than move again in a few years. Do you anticipate the need for your parents or in-laws to live with you at some point in the future? Do you plan to start or expand your family? What about boomerang kids who’ve left for college but might need to move home again after graduation?
If you’re looking for a more spacious home, RealtyHop analyzed price differences between two-and three-bedroom units to highlight some cities with the most affordable housing for families. Cities like Philadelphia, PA, Birmingham, Alabama, and New Orleans LA, topped the list for housing flexibility. In California, Sacramento offers one of the most affordable housing markets for families.
Interest Rates
Changes in interest rates can affect a buyer’s ability to afford a home. As rates rise, interest takes up a larger percentage of a homeowner’s monthly mortgage payment. This means the buyer must use additional funds from their budget to cover the increased interest or offset the additional amount by paying a lower principal. When shopping for a mortgage, take note of the lowest available interest rates. To measure how different rates affect your housing budget and the overall amount you’ll pay to purchase your home, you can plug the variables into an online mortgage payment calculator.
Budget
For homeowners, daily expenses, repairs, and maintenance costs can affect your household budget long after settlement. Renters will not cover the cost of maintenance, but may pay some utilities. However, homeowners must cover the full cost of service and repairs on their home.
If you own a home and the toilet breaks, you can’t call a landlord and ask them to send a plumber. Homeowners incur these added costs of repairs in addition to a monthly mortgage payment. Prospective homeowners should consider budgeting for the following:
- Mortgage payments
- Property taxes
- Homeowner’s insurance
- Utilities
- Maintenance fees if you live in a condo or co-op unit
- HOA fees
- Lawn care and snow removal
- Pest Control
- Repairs and maintenance
Also, don’t forget to set aside money for additional costs to establish your home. You might need to buy furniture or possibly renovate some of the rooms to reflect your personal style.
However, even with the added expenses, buying a home can still make sense financially. You will own a large asset that increases in value over time, plus you can potentially generate more cash if you rent it or resell it in the future.
Should I Rent or Own a Home? How to Know When You’re Financially Ready to Buy
First-time buyers transitioning from a rental will need to financially prepare for such a large purchase. To obtain the best interest rates and loan terms, you’ll want to present a clear picture of your ability to pay for a home to your lender. Sellers want to accept an offer from a strong buyer. Financial stability and a large down payment can help set you apart in a competitive bidding situation.
Focus on Saving for a Down Payment and Closing Costs
If you believe that you can afford to buy in the next year, continue to save for a down payment. Most mortgage lenders look for buyers who can submit a down payment of 20% but may accept a smaller amount. Buyers must also submit payment for closing costs like title origination fees and agent commissions.
Buyers should also learn as much as they can about the costs of owning a home and build extra savings to assist with the transition to homeownership. Closing costs, mortgage points to buy down your interest rate, or funds needed for home renovations may affect your household budget in the first year. Serious buyers may also offer to pay a smaller deposit known as earnest money when submitting an offer, so it pays to have liquid cash available when touring homes.
Improve Your Credit Score
If you haven’t checked your credit report for a while, request a copy before you start your home search. Many banks offer free online services that check your credit score without conducting a hard pull. Review your credit history, and if needed, take steps to improve your credit score. Dispute any errors you see and repay all past dues.
If you lack a solid credit history, you can demonstrate financial responsibility by carefully establishing a credit card or auto loan account and paying it off on time each month. Working toward a good credit score gives you more options as you shop for mortgages. Lenders will offer the best rates and terms to the strongest mortgage applicants.
Understand Your Insurance Needs
Most mortgage lenders require that homebuyers also purchase a homeowner’s insurance policy. Lenders maintain an interest in your home until you pay off the remaining balance and gain full ownership of the property. Therefore, they require an insurance policy to limit their risk of loss. In addition to reducing risk for the lender, a homeowner’s insurance policy also protects the homeowner from large unplanned losses. As a first-time buyer, you may not have the experience to properly calculate your risk, so work with a knowledgeable insurance agent to come up with a policy that fits your needs.
Conclusion
Renters considering taking the leap into homeownership will face many processes for the first time. Taking time to prepare and understand each part of the home buying process will make each step less intimidating and also provide buyers with the tools they need to successfully navigate their purchase.
If you have questions at any point, ask your real estate agent, mortgage lender, or insurance agent, or attend a first-time homebuyer’s workshop in your area. You can also check out these additional buyer resources.
