Real estate website Trulia.com recently reported that in 39 of the 50 largest cities in the country, it is cheaper to buy a home than to rent one. In its 2011 Q2 Buy v. Rent index, Trulia reported that falling home prices, declining interest rates and rising rent costs were the biggest causes behind the recent trend.
So what does this mean for you? Well, it depends.
For a first time home buyer shopping around, this may be great news. That is, of course, if you have good credit, 20% for a down payment and 24 months of solid work history. All of those things may make you more eligible to qualify for a loan, which is the first step.
This may also be good news for you if you have the additional money (not calculated into Trulia’s buy v. rent report) set aside that’s needed to cover your down payment, homeowners insurance, taxes, and maintenance costs for the house. This is where things can get tricky!
While the average mortgage payment may be cheaper than the average rent payment in many U.S. cities, it is only cheaper to buy v. rent if you can afford to do so. Most first time home buyers are surprised when they learn about all of the other costs involved in homeownership.
Here’s what you need to make sure you are considering:
Interest Rates: They are low right now which is what is fueling Trulia’s recent buy v. rent trend. However, interest rates are going to vary depending upon your credit history. Is your credit report in tip-top shape? If not, work on it. If you don’t qualify for a great interest rate you may want to shine up your credit score and try again for a better rate a few months down the road.
Down Payment and PMI: Most banks these days require a 20% down payment in order to avoid PMI (or personal mortgage insurance). If you don’t have 20% (and let’s face it, how many people do?) to put down, you will typically end up paying PMI which can add $100-$200/month onto your mortgage payment. Shop your loan options to make sure you are getting the best deal for your situation.
Property Taxes: Yes, they are unavoidable. However as a first time home buyer you need to know that taxes vary tremendously from one district to another. When you start shopping for a home, keep a close eye on the taxes for each property. A higher listing price may be able to be justfied by lower taxes.
Homeowners Insurance: Required by your bank or not, it’s a must. When you make an investment as large as a home you need to protect it. Homeowners insurance rates vary from state to state and depend greatly on the replacement cost of your home. Talk to a licensed insurance agent that can compare multiple rates for the property you are considering. Also, find out if flood insurance is required for the property you are considering- all of these factors can heavily weigh on your monthly home payment.
Maintenance/Repair Costs: Finally, people looking to buy a home because it is cheaper than renting, should consider the costs involved with maintaining a home. If you have been renting for awhile you may be used to calling your landlord whenever a pipe bursts, the fridge conks out or the A/C unit needs a tune-up. However once you sign that deed, these costly home repairs are now your responsibility. Cover your bases by having a qualified home inspector check the home thoroughly before you make an offer. Know how old the systems and appliances are and find out if there is a home warranty. Also, if you aren’t very handy, find a maintenance company or handy man that is affordable in your area in the event something does go wrong. All of these things may help you prevent costly, unexpected repairs.
So is it cheaper to buy than rent? It really all depends. It comes down to your personal financial situation and what you can afford. Take advantage of the knowledge of experts in the field (mortgage brokers, home insurance agents, home inspectors, etc.) to make the best decision for you.
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