Should you rent or should you buy? Here's everything you need to consider before you make this important decision.
By: Susan Schneider|
WHAT IF…? If you don’t have a 20% down payment or your credit score is not so hot, don’t despair. If you really want to buy, check into FHA loan options (1-800-569-4287). You can also find out about local and state programs for grants to help with down payments and closing costs (hud.gov/buying/localbuying). |
With all the uproar surrounding thesituation in the housing market, there’s plenty of room for confusion. We asked financial expert Pam Krueger, creator, producer and cohost of MoneyTrack on PBS, for her advice.
Q: Should prospective firsttime homebuyers take the plunge now or should they wait?
A: The word is go, baby, go—with some caveats. If you have solid credit reports, scoring higher than 680 (go to myfico.com/Default.aspx for your report), steady jobs and income, and if you have a 20% down payment, you’re in good shape. Home prices are becoming more affordable, and credit-worthiness standards are back up where they belong. This means that you will be matched up only with a home that you can actually afford, versus getting approved for something you can’t afford. Lenders now have the incentive not to make crazy loans, while you, the borrower, know a lot more than we knew before.
Q: Can you elaborate on what we need to know?
A: Home buyers should know not to rely on the lender to tell them what they can afford—they have to do the math. You can build your personal wealth through your home, but you have to be realistic. First, you need to have a timeline for how long you intend to stay in the house. Don’t buy a home unless you know that—barring unforeseen circumstances— you’ll be staying in it for at least five years. That is enough time for the house to start to appreciate.
Q: How does home appreciation differ now from the way it was in recent years?
A: During the recent housing bubble, people thought their homes would continue to appreciate at 10% to 13% a year, whereas today’s 3% to 6% a year is realistic. It no longer makes sense to buy and flip a home. Homeownership is a good way to make money, but it is a conservative way to do so.
Q: How can you figure out a home’s “true cost”?
A: After your mortgage payments, consider taxes and insurance. Then ask the sellers what it costs them to actually run the house (plumber’s and electrician’s bills, repairs and so on). All of this taken together is what you will probably be spending.
Q: What if you find that you’d spend less if you rent?
A: Let’s say it would cost you $1,000 to rent on a monthly basis and $2,000 to buy. You could come out ahead by renting if you put another $1,000 in a savings account. You’d have to pretend that money was going into a mortgage. Go to dinkytown.com and plug in your numbers on its rent vs. buy calculator. See what it tells you!
Q: What else should home buyers beware of?
A: Realtors often say you’ve got to buy because of the tax deduction. This is true if you’re in a higher tax bracket, but for most newlyweds it’s nothing to get too excited about.
