After graduating from college I couldn’t believe I would be a homeowner 3 years later down the road. One of the biggest things I feared was the large upfront cost that was associated to buying a home. But then again I really needed change because most of my college years I was living in an apartment.
However there is good news for you!
As you build your career, save a little here and there, and maybe start a family, you may finally decide to buy a home because you’re able to obtain money more easily. On the other end of the spectrum of age, homeowners who are retiring or the “kids” have moved out may choose to downsize and sell their family home. They may decide to rent one last time because it maybe suitable for them.
As an old-school sociologist you should agree with me that history always repeats itself or to the very least that patterns become very noticeable. One of the patterns that are noticeable is the housing market. With the housing market there has been ups and downs due to downsizing efforts by the baby boomers, the spike in housing costs in high-populated metro cities, and also due to the cause of high student debt that prevent many first time home buyers to save enough money to make a down payment.
No matter what the socioeconomic forces are that affect the home market, determining when and where to purchase a home for you or your family is a personal choice that will demand for careful deliberation. Please understand that every market is different and what will work in Bloomington-Normal, IL may not work in Nashville, TN and vice versa. American culture also plays a vital role in the housing market because homeownership is idealized to a certain extent; to where social pressure and emotions can affect decisions just as easily than financial concerns.
If you’re the individual who is stuck in the middle of important housing decisions I’m going to help you through this journey.
Cost associated with owning a home:
Buying a home is associated with many upfront costs that may be paid out of pocket when the seller has accepted your offer or at the time of closing the transaction. Let’s go dive into these costs
- Earnest Money:
Don’t let your Realtor or agent tell you that there is a standard amount to put down. Earnest money can be any amount you want, but keep in mind that earnest money is to tell the seller how serious you are on purchasing their estate. It’s good practice to accompany your offer with an “earnest money” check. Some people may use the term “trust money” instead of earnest money.Typically, earnest money has ranged from 1%-3% of the total purchase price of the estate or what the housing market conditions are or the preferences of the seller. There’s really no set value. After the acceptance of your offer has been made, the earnest money is then deposited into an escrow account and the money will be credited back against your closing costs or down payment.
- Down Payment:
A down payment is the percentage of the estates purchase price that you’ll pay upfront at closing. The down payment needs to be specified in the purchase offer, but it may be modified as long as the seller agrees to it before closing. Many factors come into play to determine your down payment like: housing market conditions, what the seller wants, credit profile, loan type, and more. Typically down payments range from 3.5% (FHA loans) to more than 20% (get more equity) of the purchase price.
- The Appraisal:
The purpose of the appraisal is to ensure the offer price matches the actual value of the estate. Lenders require this before approving the loan. The cost of an appraisal varies by location but they can typically range from $300-$500.
- Home Inspection:
A home inspection is an option but I HIGHLY RECOMMEND you get one. A home inspector is a licensed individual who is trained to find potential problems and possible defects to a property that may not be apparent to an inexperienced buyer doing a walk through. Prices vary from location to location.
- Property Taxes:
Property owners pay taxes upfront during different periods of the year. However, most pay in six months increments. You will need to pay the seller to compensate for already paid taxes from the period between the closing date and the end of the current tax period. Depending on the time frame you close on the house, you may not have to pay nearly anything.
- Home Insurance:
Lenders require proof of home insurance prior to closing. Most of the time you will have to pay the first years premium up front. Home insurance cost varies on many factors such as: the value of the property, style, location, credit score, policy deductible, coverage limits, and so on.
Other possible closing costs to consider:
- Credit report fee
- Loan fees
- Title insurance
- Tax recording
- State and county transfer taxes
It’s typical that closing costs can cost between 3%-4% of the purchase price of the estate, and more in certain instances.
Reoccurring Costs From Owning A Home:
If you’re a first time homebuyer you can expect reoccurring costs all the time. Some of these costs are included in the monthly escrow payment you make to your lender while the other costs are paid out of pocket.
- Property Taxes:
Property taxes are determined by the city or county you live in. These taxes help fund things like public school, better roads, and other services that affect your local area. Property tax rates vary from location, however each modification in property taxes will most likely lead to a tax increase. Property taxes are paid in your escrow payment monthly- you will pay 1/12 of your annual taxes each month.
- Homeowner Insurance:
This is similar to property taxes; you will pay 1/12 of your homeowner’s premium with your monthly escrow payment. Homeowner insurance premiums can vary due to various factors from year to year such as: the estates appraisal value, deductible & coverage amounts, credit score, and so on.
- Loan Payment:
If you’re not paying in cash upfront then you’ll most likely have a loan payment. Most homeowners and estate owners typically have a loan term that’s usually 15-30 year terms. If you purchased your home or planning to purchase your home with an adjustable-rate mortgage, your rate gets benchmarked and your payments will vary as the benchmark changes. On the other hand, if you get a fixed rate mortgage, your payments will remain the same throughout the whole loan. Your loan payment will be part of your monthly escrow payment.
- Private Mortgage Insurance (PMI):
If you’re getting your mortgage through a private lender and the down payment you put down is less than 20% of the purchase price of the home, you’re bound to have private mortgage insurance. This is another fee that will be included in the escrow monthly payment.So what’s the purpose for PMI?PMI is a tool to protect your lender from financial loss if your home or estate gets foreclosed. Lenders can potentially lose money since your property will be sold at a discounted rate that is not relative to the original purchase price. In most cases, private lenders will take off PMI charges once the loan to value reaches 80%. Keep in mind PMI rates vary from person to person.
If you’re renting right now and you don’t have to pay many utility costs, then please consider that a luxury. As a homeowner or estate owner, you’re responsible for paying all the local services you wish to get and utility usage. Such fees include: electric, water, gas, garbage, internet, cable, and more. These costs vary by location and in some instances by usage, and sadly these costs are out of pocket.
- Maintenance and Repairs:
When things go bad you can’t call the landlord and tell them your issues. You are fully responsible for all home maintenance and upkeep of the property. It’s will be essential that you do the small things like, replacing fixtures when they go bad, changing vent filters, cleaning HVAC system, cleaning septic tanks (for my Tennesseans), cutting the grass, fixing leaks, and the list can go on.My tip: Save at least 2% of the purchase price of your home every year incase repairs and upgrades need to be done.
Possible One-Time Costs To Consider:
- Moving costs:
Whether you plan to do it yourself or hire a team, moving from place to place can be costly. Depending how far you have to go, you’ll need to consider gas usage and transportation method. Some people have enough stuff to squeeze everything in their vehicle, while others need a U-Haul or even a POD. It’s hard to figure average costs because everyone’s situation is different. The best thing to do is be strategic when planning. Prices can add-up very quick.
The first time I bought a home, I remember putting everything I had from my apartment in the house and my home felt empty. Most likely you’ll have the same results because in most instances you will want to buy something larger than what you previously had. That means you need to buy more furniture, fixtures, and things that take up space to make your new home not look empty.
- Repairs, Improvements, and Renovations:
There are some things that are not covered under your home insurance plan. In that case you are responsible to get those issues resolved while having to pay out of pocket.An example would be: The sump pump in the basement goes out during a 4-day rain period and your basement starts to flood and you are not covered by any flood insurance, any mold elimination costs are yours out of pocket.It’s a good rule of thumb to make sure you have an emergency fund when things don’t go well in the house. If you have kids or pets then you just never know what the future may hold, but replacements can get costly very quick and also add up. You just never know when a child may think your walls is a big piece of paper to draw on or your pet decided to tear up your carpet.If you’re already a homeowner and you want to take on some bigger challenges in life then home improvements and renovations is just for you. Depending on the project you may have to pay out of pocket or take out a home improvement loan. Projects can vary in cost and it’s best to get a rough idea of the overall costs. They say the average cost for a new kitchen is close to $20,000. But once again this average price is so subjective since everyone’s kitchen size is different, the type of counters that will be used, the different fixtures, and so on. Improvements and renovation projects can boost the value of your homes appraised value, but don’t go into a project assuming that either.Now that I’ve discussed the costs for owning a home, I’m going to turn things around and discuss the things about renting
Cost Associated With Renting:
- Monthly Rent:
If you’re not sleeping at moms & dads house be prepared to pay up. Monthly rent can very from location, size of places, amenities, and a handful of other factors. The difference from renting and buying is that you’re giving someone else money to either put more money in their wallet or you’re allowing them to pay off the property to gain more equity. The bottom line is you’re making someone else richer. In some situations you may live in a rent-controlled area or in a city that has strict renter protection laws, but for the most of us that is not the case. Unless you live under one of the two scenarios, rent may go up whenever you sign your lease.
- Security Deposit:
Your landlord may ask you for a security deposit to insure against property damage that requires a cost to repair it, broken leases, delinquent rent, and other incidents that puts the landlord at risk of money loss. Security deposits can be any amount, but some states do limit at 1.5 times the monthly rent.
- First Month Rent:
This is another upfront cost from renting that most landlords do sometimes require. This money is usually used in two types of scenarios. If you decide to move in the middle of the month, the landlord may accept a prorated payment. The next scenario is, you plan to move somewhere else and your last month is covered.
- Pet Rent:
From my experience I’ve always had to pay an initial pet deposit and then pet rent the following months until I moved out. The pet deposit was non-refundable. However, every landlord is different and his or her charges may vary.
- Laundry Costs:
Many rental properties don’t have the luxury amenities like owning a house. One of the essentials that many rentals lack of is the ability to own a personal washing and drying machine in your unit. Tenants are usually forced to find a nearby laundromat or to use the coin operated machines that are onsite.
Utilities covered by your landlord will vary from place to place. It’s best to go shopping around for places to see who will cover what. I’ve seen places where no utilities were covered and in some situations I’ve seen all of the utilities covered.
Advantages Of Buying:
- Tax Benefits:
If you are a first time homebuyer then I have great news for you. Owning a house has several tax benefits, however please keep in mind …not ALL homeowners qualify for these benefits.
- Federal Tax Deductions:
If you’re considered in the upper tax bracket then listen up. If you are itemizing federal income taxes, you have the option to deduct your property taxes and the interest paid on the mortgage. Hopefully that will reduce any tax burden(s).
- Homestead exemptions:
There are a handful of states that exempt owner occupied estates (also known as homesteads) from a portion of the property tax that would normally accrue. For an example, Tennessee exempts the first $50,000 of a home’s value from property tax assessments. So a $150,000 home in Tennessee is taxed as if it were worth $100,000.
- Build Equity Over Time:
This is one of the few upsides on owning an estate is the ability to build equity over time. Renters do not get this opportunity. On most mortgages, a portion of your payment goes towards the loans interest and the remainder pay down the principal. Every single penny that goes into your loan’s principal will represent a certain amount of equity you have on the property. Basically, you’re gaining actual ownership of the property. The good news is that once you get to the 20% equity mark (LTV is 80%) , you can take advantage of your equity through a home equity loan or you can take advantage of refinancing your estate to lock into a lower interest rate or a longer payment window.You can also increase your homes value and thus decrease your LTV by taking advantage of home improvement projects. If you’re driveway is gravel like most rural houses in Tennessee and you decide to get it paved, you are improving the land and it’s functionality, and therefore it may increase the value of the land.
Creative Freedom With Less Restrictions:
Who doesn’t like to decorate their home?! Decorating your home tells a lot about you, your personality, and your lifestyle. Once you own a home you’re not required to ask for permission on how to decorate your home or home improvements you want to get done. However, this is assuming you are not breaking any local building codes or violating any homeowner’s association rules.
Being able to change your living environment is a fun process and a privilege that is not available to 99% of renters.
- Rental income May Become A Possibility:
Most people don’t think of their property as an investment and that’s okay. One of the things you can do with your property is to turn it into an income source. If you decide to go this route you can potentially offset a portion or even all of your mortgage, tax, and insurance payments.You will need to follow all of your local rental property laws, but you have the option to rent out a portion or even all of your property. If you have a basement bedroom you can rent a room to a friend, if you live in a duplex you can live in one unit and rent out the other unit, or you can purchase a second house and move into that house which will leave the entire property free to rent.If you’re thinking about short term renting you can try things like Airbnb and VRBO. There are numerous platforms out there so please do your homework on each one.
- Becoming Part Of A Community:
When buying a home, homeowners usually stay in their homes longer than most renters. Homeowners become part of a community and they also become a vital component of that community. Some homeowners become members of the neighborhood association, they help out with block parties or invite their block over for a movie night, they get involved with their kids school things, and so on. Most renters may not get involved with their local community particularly if they already know they will move in a year or so.
Disadvantages of buying:
- Responsibility Of Repairs & The Upfront Cost:
As a homeowner, you will be responsible for covering all the uninsured maintenance and repairs on your home. A rule of thumb is to save 1%-3% of the purchase price of your home for unexpected repairs. Repairs can vary in cost but some of the most expensive repairs are replacing a septic tank, roof, and a furnace.
- Financial Loss Due To The Housing Market:
Many people don’t think of their home as an investment entity, but property values are driven by the whole housing market. Many homeowners don’t realize that just because they build equity over time that equity doesn’t equate to profit. If the housing market starts to crash, home values in your area start to decline or remain flat, you run the risk of a financial loss if you plan to sell during those time periods. As a renter you will not be gaining any equity, but you won’t have to worry about anything depreciating your asset either.
- Upfront Costs Are High:
When buying a home you have to consider all the costs that are associated with buying the estate. You’ll be faced with closing costs, the down payment, attorney fees, title fees, and so on. In the grand scheme you can spend over 20% of the purchase price of the estate.
Advantages Of Renting:
- No Worries About Repair & Maintenance Costs:
I remember when the sink broke and the food disposal went out. All I had to do was call a hotline and within a few hours someone was there to take care of the issue. As a renter you don’t have to worry about the cost to do repairs or maintenance.
- No Worries About The Housing Market:
The housing market is like the stock market sector. Many factors drive it up and down over a course of time. If you are renting then don’t worry about it because that is the landlord’s issue.
- Relocation Made Easier:
When you rent you have a little bit of freedom if you need to relocate in a short notice. Granted you may be required to break your rental lease, you may have to pay a penalty fee. However, you can partially or fully offset those costs by subleasing or negotiating something with the landlord.On the other hand, if you own a home you can’t just get up and leave. Selling an estate is a large process. If you need to sell your estate quickly, you may be force to lower the asking price and you may be forced to accept a lower price that will usually lead to a loss on your investment.
- Credit Requirements Less Strict:
During my college days most of my landlords required a credit check. I only worked part time and I was approved very easily. As long as your credit report doesn’t have large red flags such as bankruptcies and other serious judgments then you don’t have much to worry about.Mortgage lenders will have higher credit standards for homeowners. Scores that fall below the 680 to 700 mark are considered higher risk versus credit scores that are 700+. Very small changes to your credit score can make a big impact to your mortgage rates to where you can spend or save thousands of dollars of interest over your loan term.
- May Get Lucky With Paid Utilities:
In college I got pretty lucky. The place I was renting from gave me unlimited water and heating usage at no charge. Many multi-unit building owners have some sort of perk but small units like duplexes may be a needle in the haystack to see any benefits. However, homeowners must pay all utility costs, which may be several hundreds of dollars depending on dwelling size and usage.
Disadvantages Of Renting:
- No Tax Benefits:
As a renter you will not be eligible for any housing related federal tax credits. Homeowners are able to deduct property taxes and mortgage interest on their federal income tax returns. Depending on your mortgage interest and property tax, this shortcoming can raise your federal tax liability several hundred dollars per year.
- Say Bye-Bye to equity building:
If you’re not in a contract to a rent-to-own agreement, every penny you put into your rent is gone forever. No matter how many years you spend in that unit or property, you cannot build equity in the property under a regular lease agreement. If you are planning to stay in the area for a handful of years, it may be a better financial decision to purchasing a homestead.
- No Control On Housing Costs:
Your landlord has the right to raise rental costs once your current lease expires. Landlords often raise rental fees to match rent increases else where in the market. Luckily, if you have great rapport with your landlord it is less likely you will see a significant change in increased rental fees. However, don’t be surprised if you see additional fees each new contract you have to sign.
Depending on your living situation renting may work better for you and vice versa. Only you and your family can make the final choice. However, when making a final decision you need to keep an open mind. It is better to wait and make the right decision, rather than rushing into something and making a large financial decision that you may regret.
If you are caught in the middle by making a large financial decision to buy a home give me a call and we can get this sorted out.
Call me at: 615-582-7777