In today’s market should you rent or buy?
“Your decision to buy or rent depends on your financial situation and your lifestyle,â€ said Lynn Tollett, vice president of business and community development for HSBC bank.
Although interest rates are at historic lows, homes are selling below their market value and several tax incentives are available, still buying may not be the best option for you. There are many other things to consider. Tollett presented the advantages and disadvantages of owning and renting at this week’s home buyers seminar sponsored by the Bedford Central Community Development Corp. She recommends that you weigh the two to find out what is best for you.
Advantages of Renting:
You might have lower monthly rent versus a mortgage payment
Your security deposit is probably less than a down payment and closing cost
Renting is a good choice for those not ready to make a long-term commitment
You don’t have to manage or pay for repairs and maintenance on the building or the property it sits on.
Advantage of Owning:
Asset development: You build equity with each mortgage payment
Wealth creation: If the value of the home goes up you can make a profit
Tax advantages: Your mortgage interest, real estate taxes, private mortgage insurance and points are all tax deductible
Disadvantages of Renting:
No ownership and you’re not building assets
Rent may increase over time
Lack of stability. For example, you may have to move at your landlord’s request. He/she may have to sell the building.
Disadvantage of Owning:
Insurance and tax bills may go up
You have to pay for home maintenance
You have to maintain your land, yard, lawn etc.
Owning may be more expensive
If you’ve decided that it’s time to buy, it’s time to figure out how much you can afford. A down payment is usually 10 to 20 percent of the total cost of the home, but there are several programs that you can apply for that allow you to put down as little as 3 percent. To find out what you qualify for visit the US Department of Housing and Urban Development (HUD) website.
As a general rule of thumb you should spend no more than 28% of your gross income on your mortgage principal, interest, taxes, and insurance also referred to as PITI, Tollett explained.Â For example, if your annual household income is $50,000, you can afford to pay $1,167 a month.
Tollet gave us the exercise below to determine what this means in terms of dollars based on our individual financial situations. Try it.
Your Annual Income x .28= $_________ (A)
$__________ (A) / 12= $__________ (B)
Divide your answer from line (A) by 12 and you’ll get the amount you’d be able to afford each month.
Lenders also want to know how much debt you’re carrying, even if you pay your bills on time. Tollett explained that you can have a large enough income for a mortgage, but still be denied for a loan if your regular debt payments are 36% or more of your total income.
You can evaluate the monthly amount you can pay towards your debts by completing the exercise below.
Annual income x .36= $__________(C)
$__________(C) / 12= $__________
This is the monthly amount you can pay towards any debt including credit card payments, loans, and the total PITI amount from line B.
Add up your monthly debts:
Credit Card Payments Â Â Â $____________________
Any LoansÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $____________________
(B) from aboveÂ Â Â Â Â Â Â Â Â Â Â Â Â Â $____________________
(D)Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â =$____________________
(D) should be smaller than or the same as (C) for you to qualify for the loan.
This exercise really helped me put everything into perspective. How about you? Merry Christmas and thanks for following. We’ll resume after the holiday with information on condos and cooperatives. Follow me at www.twitter.com/LaToyaReports.
Other posts in The Homebuyers Toolkit series:
LaToya M. Smith is a staff writer at Black Enterprise