Contrary to popular belief, there are pros to renting vs. home ownership. Proponents of renting value the flexibility it offers – especially for short term stays. Renting also ensures that unforeseen home repairs won’t derail your savings. While most understand the long-term benefits of home ownership, it may feel out of reach due to massive cash down payments and the added expense of maintaining a home. Those who can’t qualify for financing due to a lack of savings, other debts, or poor credit simply have no other choice. Since renting does not provide the opportunity for generating wealth like home ownership does, many encourage renters to jump off the merry-go-round as quickly as they can. We take a more balanced approach. Before you renew your lease, ask these 5 questions to see if home ownership could be in your future. 1. Do you qualify for down payment assistance? Down payment assistance (DPA) money comes in the form of grants (literally free money) or second liens (a second mortgage). DPA’s provide home buyers with some - or all – of the down payment needed to purchase a home. These programs may even cover closing costs (the up-front fees associated with buying). If you qualify for DPA, transitioning into home ownership with little to no up-front cash is a game changer. Those home ownership goals that previously seemed unattainable may be within reach. Bottom line: If you are renting because you aren’t sure you have enough cash to purchase a home, discover how DPA’s could bust the myth. 2. Is your rent at risk of increasing at a faster pace than your income? Rents have jumped sky-high – increasing on average 8.5% year-over-year the last two years. If your income is not keeping up, then your housing budget is taking up an increasingly greater portion of your monthly income. Meanwhile, fixed-rate mortgages provide homeowners a payment that will remain the same for years to come. Bottom line: Knowing your housing cost this year - as well as 30 years down the road - is a tremendous advantage that renting does not offer. 3. Could you benefit from some tax write-offs? Did you know that home ownership offers the opportunity to deduct real estate taxes up to $10,000 as well as the interest you pay on your mortgage? That brings your taxable earnings down each year. However, this deal isn’t quite as sweet as it seems since homeowners need to account for a possible annual increase in escrows (property taxes and homeowner’s insurance). It is likely homeowners make out better even after future escrow increases, but you may not if you are in a market where home values are skyrocketing. A good real estate advisor will help you walk through this. Bottom line: Tax write-offs can offset future escrow increases nicely. This – combined with the fact that rental payments increase over time while mortgage payments do not – suggests home ownership is a better choice if possible. 4. Are you saving for retirement? If you aren’t in a situation where you can set aside money for retirement, a home can create a forced savings account due to equity gains. Simply put, the difference between what your home would sell for today less what you owe on the home equals how much equity (or owner’s share) you have in your home. As you make each monthly mortgage payment, part of the payment goes toward the cost of borrowing the money (interest) while the other part goes toward buying your ownership stake in the home (equity). Equity can be thought of almost like a down-the-line rebate on your monthly housing cost. When it’s time to sell, you get to keep your equity gains. And if that isn’t impressive enough there’s more! Homes historically appreciate (increase in value) about 3-4% every year. Our market has crushed previous games by hitting as much as double digit increases. This all means that not only will you get your equity rebate, but you will also sell your home for a higher price than you paid for it if historic trends hold true. This cash out of “free money” from equity gains and appreciation is one of the biggest reasons so many advocate for generating wealth through real estate. Bottom line: With your ownership equity in the home increasing every month as well as the home’s value increasing annually, home ownership provides a forced savings model that builds wealth in retirement. 5. Do you have a rainy-day fund? If you don’t have the ability to set a little cash aside once your home purchase is done, unforeseen, costly home repairs could put you into credit card debt that erodes wealth. Homes that have deferred maintenance, old systems or other issues could leave you footing a huge bill down the road. In the short term, a home warranty can offset these potential spends, but using warranties as a long-term strategy simply isn’t the best move. Bottom line: Owning a home comes with risk and savvy shoppers should keep some cash in their pocket. If you can’t, home buying today may not be the best move. While renting provides a needed solution, it is likely not the best long-term choice compared to the benefits of owning a home. At least six months before it is time to renew that lease, speak with a trusted real estate advisor to see if there is a way to build wealth through home ownership. Buying takes planning and planning takes time. If you are wondering if buying in the next 6-18 months could be right for you, let’s chat. Never want to miss a post? For more useful real estate tips & tricks, subscribe to our mailing list or contact us with any real estate questions.
Authored by: Kat Medaries, REALTOR® MT Realty Advisors of Long & Foster Real Estate Village of Midlothian Sales, 1100 Jefferson Green Circle, Midlothian, VA 23113 Licensed to sell in the Commonwealth of VA | Equal Housing Opportunity For informational purposes only. Not intended as legal, financial or credit counseling advice. Seek the assistance of a professional.
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