As a loan officer, one of the things I am often asked is “Should we buy or rent?” My answer is that it depends. Assuming you live in a desirable area with a stable economy and you are planning to stay there for at least 3 years and as long as you expect your source of income to remain stable, it almost always makes financial sense to buy – here’s why:
- You’re heard it a thousand times – and it’s just as true today as it was 50 years ago – location, location, location. Real estate is only a good investment when you invest in a home that’s in a good area of a city where people want to live. The outlook in your town may be different than in other parts of the state or other parts of the country. Do your homework and make sure that the market in your area is stable or likely to appreciate.
- Home prices are always tied to employment opportunities. If the city you want to invest in has a diversified economy with a healthy job market, the housing market is more likely to be stable as well. This translates to a safe investment.
- Do the math. If you are renting for $1,500.00/mo. and your landlord increases your rent payment by 5% per year, you would be paying $100,000 over a 5 year period and you would have nothing to show for it. Any improvements you may make to the home would be going into your landlord’s pocket not yours.
- Even though interest rates are not as good as they were in 2013, they are still at historically low levels. Assume you buy a home in Austin, Texas for $375,000.00 and you invest 20% for your down payment. You would have a mortgage of $300,000 for 30 years. Based on an interest rate of 4.75% (APR = 4.798%), your monthly payment would be about $ 2,500.00 including property taxes and insurance. Assuming you’re in a 25% tax bracket, this would be equivalent to a rent payment of approximately $2,000.00/mo. The best part is that if the home appreciates at a modest rate of just 5% per year, at the end of 3 years the home would be worth $434,000.00. Although appreciation rates are never guaranteed, if you do your homework you should be able to predict with a fair degree of certainty what the rate of appreciate should be.
- The benefits of home ownership are numerous. If you can find a good neighborhood in a good part of town you will notice that you will build a sense of community, you will take pride in ownership and appreciate not having to get the landlord’s permission to do what you want to do and you will be building equity to boot.
- When you buy a home, you can adjust the amount of your withholding tax to the IRS. This allows you to have less money withheld from your paycheck each month so that you can handle the new mortgage payment more comfortably.
If you are thinking seriously about becoming a homeowner it’s important to talk to a professional who understands your personal financial situation as well as the local market in which you intend to buy.
Dorothy Erminger, Residential Loan Originator NMLS # 216624
Dorothy Erminger has been helping people to buy homes in Texas since 1992. She has a degree in Education from Stephen F. Austin University in Nacogdoches, Texas.