So many factors go into deciding to transition from renting to owning. You have to consider your personal goals such as if you’ll stay in the same area; if your family is growing and you need more space; if you’re ready for the responsibility and commitment of being a homeowner; etc. Of course, financial considerations are the biggest hurdle toward home ownership, including if you can come up with enough of a down payment, how much house can you really afford, if you have the credit qualifications to be approved for a good home loan program, and more. Add to that this conundrum: Is renting actually costing you more than buying a home would?
According to a new Zillow report, rents are skyrocketing in various parts of the country. In Denver, the median rent has jumped over 10% in one year, while Kansas City, Portland, and Austin have seen climbs in the 7-8% range. Overall, the cost of rent grew twice as quickly as household income between 2000 and 2014, forcing renters to use nearly 30 percent of their income to cover the rent.
If that’s the case in your area and rents are getting out of control to the point in which it makes no sense to sign another lease, it could signal that the time is right to look into buying. Especially with home mortgage interest rates still below 4 percent, buying now could be a wise move.
Here are some things to think about if you’re on the fence between renting and buying:
Owners Can Come Out On Top Financially
It’s not enough to simply compare your current rent to what a monthly mortgage payment would be. In high rent areas, it might be close to the same. However, you should also consider the tax implications of paying a home loan. For starters, the mortgage interest tax deduction can result in a significant tax savings since it reduces your tax liability.
In other words, if you pay $25,000 in mortgage interest and earn $150,000, you will only be taxed on $125,000 of that income. At a 25% tax rate, It would reduce your tax burden by $6,250 per year.
Especially in the early years of your mortgage payments, you’re paying practically all interest and very little principle, so it’s quite possible that the tax savings could be huge. (As with any tax plan, check with your tax advisor before filing).
Click here to request a pre-approval for your home purchase.
Avoid the Renter’s Hamster Wheel
Some cities are known for their exorbitant rental prices. Renters could be paying so much that are no longer able to save up for their future home, and therefore, stuck in a hamster wheel of renting.
If you’re at the point where you feel like you’re throwing your money away each month and can’t scrape together any savings, then you might consider moving to a less expensive apartment, or moving forward with your home buying plan if you’re ready.
Assess Your Financial Health
Some things to ponder:
- Even if your monthly mortgage payment is comparable to what your current rent is, don’t forget that you’ll now be on the hook for home maintenance and repairs, homeowner’s insurance, and property taxes. Do you have some cushion in your savings or enough income to handle these potential extra expenses?
- Are you in love with short-term leases? If so, maybe renting isn’t for you. Buying requires staying put for at least a few years?
- Mortgage rates and home prices are extremely low right now, making it perfect for buyers. Fast forward a couple a years, however, and who knows where rates will be, or how high prices might climb. Then again, you need to also consider your own rental situation. You might have an awesome landlord who hasn’t raised your rent much over years. Or, your rent may have gone up with every new lease. Depending on your personal situation, having a steady monthly mortgage payment that’s fixed for 15 or 30 years might be looking better and better.
- Finally, what does your financial big picture look like? Is your income stable enough to support a mortgage payment and all of the other costs of home ownership? In a rental, you can always look for something more affordable if you have to; in a home, it’s more difficult to pick up and leave if your income takes a hit.
Becoming a homeowner is not a decision to take lightly. But if you’ve been considering it for some time as your rent continues to creep higher, it could be a good time to revisit the idea of buying.