Buy or Rent

Many people struggle with the decision as to whether they should rent or purchase a home. This article will explore advantages for renting or  buying a home.

See what price home you can afford by running the ‘Buyer PreQual’ or Quick PreQual module.

Reasons to Rent

I. Maintenance or Repair Cost

II. Rent is More Affordable

III. Flexibility to Move

IV. Responsibility of Home Ownership

V. Cash Required to Purchase a Home

VI. Qualifying Ratios to Purchase a Home

VII. Credit Score

Reasons to Buy

I. Control your Environment

II. Tax Deductibility – Property Taxes & Interest

III. Net Mortgage Payment

IV. Future Equity

V. Potential Rental Income

VI. Leverage in Homeownership

Reasons Cited for Renting

I. Maintenance Cost. Yes, it is true, as a renter you are not responsible for maintenance, landscaping, or repair cost. Annual maintenance will depend upon the age of the property and how well the property has been maintained. You can expect to have considerable costs for repair or replacement for most major components of a house over a period of time. 

As you can see, from the chart, most major components have a life expectancy of 15-20 years. The cost of replacing major components will vary with the size of the home and the quality of replacement. These are expensive items but are they offset with income tax savings and equity available with home ownership.

II. Rent is More Affordable. While this the reason often cited by renters for renting, we are not convinced. When rents are compared to mortgage payments for comparable homes within the same location, mortgage payments are quite often less than rentals. We are referring to net mortgage payment after tax savings.

III. Flexibility to Move. If your job requires you to relocate or you simply like to move every 2 years, then you are probably more suited for renting.

IV. Responsibility. As a homeowner, you cannot call the landlord to complain or to have repairs done. So yes, there is more responsibility in owning a home. But then again, there are responsibilities associated with marriage, raising children, or owning a car.

V. Cash. Many people continue to rent due to the cash requirements to purchase a home. Below are 3 options which can dramatically reduce the amount of cash required to buy a home.

1. Gift funds. You may get help for down payment or closing cost with a gift letter. This must be a gift without terms of repayment. A gift of funds may be used to cover down payment or closing cost on FHA, VA, or USDA loans. Depending on the conventional loan LTV (loan-to-value), there may be restrictions on the amount of the gift funds.

For FHA and VA loans, gifts may come from a family member, a friend, an employer, or some other approved source. For conventional loans, the gift may be restricted to a family member. People who are considered relatives include a spouse, child, or other dependent, in addition to anyone related by blood, marriage, adoption, or legal guardianship.

2. Seller Credits. Depending on the loan type a seller can pay a large portion of your closing cost. On a FHA or USDA loan, the seller can pay up to 6% of the purchase price. For VA loans, the concession is capped at 4% and conventional loans somewhere between 3% and 9%.

3. Lender credits. A lender credit is money from your mortgage lender to help cover the mortgage-related closing costs associated with the purchase of your house. Your lender may offer you several thousand dollars in credit to cover most (or all) of those costs. The trade off for the lender credit is a higher interest rate on your loan.

The combination of Gift Funds and Closing Cost Credits could result in little or no money required to buy a home. Consult an AskChristee agent and/or a Lender for more details.

VI. Qualifying Ratios. Qualifying ratios are the relationship between your gross monthly income and proposed mortgage payment and monthly debts. The acceptable ratios will depend upon your credit score and amount of down payment. We suggest you use Christee modules to establish a comfortable mortgage payment and possible price home you could afford to buy.

VII. Credit Score. Your credit score will play a significant role in qualifying for a mortgage loan. If your credit score is below 580 then you need to devote some effort in repairing your credit. Paying bills on time and paying down balances on your credit cards are steps you can take to increase your credit score. Issuers report your payment behavior to the credit bureaus every 30 days, so positive steps can help your credit quickly. You may wish to employ the services of a credit repair company.

Judgments create a barrier to obtaining a mortgage approval. You may be able to obtain mortgage approval with an outstanding judgment provided you have a payment plan and make the agreed upon payments over a period of time. The resolution for judgment issues will vary depending upon the mortgage type, we suggest you speak with a Lender.

AskChristee Module ‘Buy or Rent’ provides a thorough and objective analysis of renting compared to the costs and benefits of home ownership. 

Reasons to Purchase a Home

I. Control your Environment. One of the major negatives for renting is the inability to create an environment conducive to your lifestyle. As a renter, you can’t do simple modifications such as painting walls, updating or painting cabinets, etc. As a homeowner, you have the complete freedom to move walls, add a deck, choose the color of carpeting or refinish floors. You can create a unique home atmosphere for you and your family.

II. Tax deductions. The Federal government subsidizes home ownership. In fact, it is the largest government subsidy – larger than welfare or food stamps. How is this possible? It’s quite simple, your Federal taxable income is reduced by the amount of mortgage interest plus property taxes. For example, your combined gross income is $60,000 annually and you purchase a $275,000 house with a $266,7000 mortgage. Your annual deduction for interest and property taxes is $10,875. Based upon a 12% federal tax bracket you save about $1200 in taxes. That’s about $108 tax savings per month. Your total mortgage payment is $1727 per month. However, when you factor in the $108 tax subsidy your effective mortgage payment is about $1618 per month – most likely lower than monthly rent for the same property.

III. Net Mortgage Payment. In the above example, we illustrated the effect of tax savings for home ownership. You should never compare monthly rent with gross mortgage payment. The comparison should be monthly rent versus net effective mortgage payment. When the payment comparison is done properly, most often mortgage payments are less than rent.

IV. Future Equity. Equity is the difference between a home’s value and the mortgage payoff (debt). First time home buyers, generally, have a small down payment thus they have very little equity in their home. Future equity is a combination of property appreciation and reduced debt. Over time, you reduce (amortize) the mortgage debt thus increasing equity even if property values remain stagnant. For most Americans, the vast majority of their net worth is the equity in their home.

To fully understand the process of mortgage reduction, run the AskChristee ‘Amortization’ Module.

V. Potential Rental Income. Unless prohibited by a local ordinance or community association rules, a homeowner has the freedom to rent part of your home to a tenant. This can be a tremendous advantage, especially for single homeowners. Adding an extra $400-600 dollars per month can really help with the mortgage payment. On the other hand, most leases prohibit subletting.

VI. Leverage in Homeownership. Leverage is the ability to use borrowed monies to your advantage. Generally, the concept is used by developers utilizing investor or bank funds in building a new project. There is no better example of ‘leverage’ than buying a home. Let’s examine the leverage in purchasing a $400,000 house with a minimum required down payment of $12,000 (3%) and closing cost of $10,000. The total cash investment is $22,000. Let’s assume home prices appreciate by a modest 2% during the first two years. After 2 years, the property is worth $416,160. That’s an increase of $16,160 or a return on cash investment of 73%. At the 2% appreciation rate, the property would return 100% of the cash investment in under 3 years.

AskChristee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only; it is not intended to provide tax, legal, or accounting advice, and should not be relied on as such. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.