To buy or to rent: The decision requires care and planning


(Jason Raish/for The Washington Post)
February 14

If, like many Washington-area residents, you’re frustrated at paying an exorbitant rent for your apartment, you may be considering whether now is the right time to buy a home.

Making the leap from renter to homeowner isn’t as simple as deciding your rent’s too high, though. In reality, you need to carefully weigh the pros and cons of homeownership in the context of your finances and your future.

“There’s a notion that we have in our heads that we have to buy a house and that it’s somehow wrong to rent,” says Anna Behnam, a financial adviser and managing partner with Ameriprise in Rockville. “The reality is that it’s not true for everyone and there are positive points to renting and to buying.”

Behnam says that renting offers the benefit of being able to move whenever you want to take a job in another part of the country or even just in a different location within the Washington area.

“It’s also nice not to have to pay for maintenance,” says Behnam. “If your air conditioning breaks down, your landlord has to pay $6,000 to replace it, not you.”

Homeowners not only need the money to make repairs, but they must make time to maintain their property, says Nancy Wert, a realty agent with Re/Max Realty Centre in Olney. Even a relatively small and newer home requires at least some maintenance; an older home may require a bigger budget for home repairs.

An important factor in deciding to buy your first home is how long you plan to stay in the area.

“The D.C. area is very transient, with people coming in for a few years for jobs with the government or a contractor,” says Shelley Green, an associate broker with the Banner Team at Long & Foster Real Estate in Bethesda. “If you’re only here for three years, you should probably rent. It’s best to stay in your home at least five to seven years to recoup the cost of buying and to build equity.”

Another option to consider, if you’re here for just a few years but think you’ll be back, is to purchase a home that will appeal to renters, says Jen Angotti, a real estate agent with DCRE Residential in Washington.

“You should look for a place near Metro with the finishes and amenities a renter might like, live in it yourself and then rent it,” says Angotti. “Of course, you need to be ready at that point to be a landlord.”

Wert says many buyers decide to become homeowners when they’re ready to commit to a location for their children to attend school, because they want to invest in that community and maintain friendships there.

Behnam says another incentive to become a homeowner is the ability to make decisions about how to decorate or improve your property rather than having to seek your landlord’s approval.

On a purely financial basis, many Washington area residents feel that they’re wasting money by paying outrageous rents and are concerned about rent increases, says Angotti. Buyers who opt for a fixed-rate mortgage have the advantage of knowing their principal and interest payments will remain the same, although property taxes and homeowners’ insurance premiums can rise.

“While rents in the D.C. metro area for Class A apartments typically increase by an average of 4.2 percent per year, we’ve had a big supply of new apartments completed in 2013, so the average rent actually dropped by 3 percent,” says Grant Montgomery, senior vice president and apartment practice director for Delta Associates, a provider of data on real estate trends. “Our data looks at new apartments being marketed, and we expect a similar pattern for 2014 and 2015, since a number of new buildings are in the pipeline to be completed over the next two years.”

Rents for older apartments and homes are not included in Delta’s data, which also showed a slight increase of 0.8 percent for rents in the District.

“Over the long term, a lot of financial planners say buying a home is a great way to build wealth, because you build equity as you pay down your loan and you have the benefit of the tax deduction,” says Angotti.

While there’s no guarantee that home values will increase during any given period and values sometimes decline, holding onto your home for the long term offers more of an opportunity for the value to increase in addition to building equity through loan repayment.

Even if you’re emotionally ready to buy a home and think it’s a smart financial move, you need to find out as soon as you can if you’re qualified to buy. While a stable job history and a solid income are important, you also need good credit and money saved for a down payment.

Are you financially ready?

The sooner you talk to a lender, the better, says Gail Kullman, a senior loan officer with Prime Lending in Alexandria.

“The way rents have escalated in the D.C. area means that buying a home sometimes costs less than renting or the same,” says Kullman. “But you need to get your finances in order and give yourself time to improve your credit score if you need to, because your score not only allows you to qualify for a loan but it also dictates your interest rate.”

Kullman warns that would-be buyers need to estimate a comfortable mortgage payment for themselves rather than relying on the lender’s loan qualification process.

“If you think you can afford a $1,500 per month mortgage but your rent is $1,100 and you haven’t been able to save, you may need to rethink that,” says Kullman. “Part of your decision to buy should be to take a hard look at your income, to see if it’s stable and rising, and to look at your assets to make sure you have enough for a down payment and for reserves in case of an emergency.”

Kullman suggests saving the difference between your rent and your estimated mortgage for a year or longer to get used to the larger payment and to generate additional savings for cash reserves and a down payment.

While the Consumer Financial Protection Bureau’s new “Qualified Mortgage” rules allow for a debt-to-income ratio of 43 percent, Behnam says she thinks that’s too high because it’s based on your gross income.

“You should base your budget decisions on your net income rather than your gross income,” says Behnam. “A lot of buyers estimate their payment based on the principal and interest they pay, but you also need to include property taxes, homeowners’ insurance, homeowner or condo association dues and possibly mortgage insurance and flood insurance.”

Behnam recommends keeping a cash reserve equal to two mortgage payments in the bank to cover potential home repairs in addition to your emergency fund of three to six months or more of expenses.

“When you look at your available cash for a down payment, you need to make sure you’re not draining your savings to get into a house,” says Behnam. “I recommend making a larger down payment of at least 20 percent, though, to avoid paying mortgage insurance, to get a lower interest rate and to make your monthly payments more affordable.”

She also cautions buyers to think in the long term about the affordability of their home.

“You need to look down the road to make sure your income will match your needs for the house but also for other expenses such as college tuition and retirement savings,” says Behnam. “Don’t look at buying a home as purely an investment,” says Behnam. “This will be your home for the next seven years or more, so you need to enjoy it.”

Michele Lerner is a freelance writer.

Five steps to take when deciding whether to buy or rent

●Develop a five-year plan. You need to own a home at least five years to build equity.

●Determine your budget. Regardless of the loan amount you qualify for, you need to know what you’re comfortable paying for your housing.

●Check your credit. Your credit score is paramount to getting a loan — you may need time to improve it.

●Consult a lender. Before you look at homes, you must know your price range and your ability to obtain financing.

●Consult a real estate agent and see what’s available in your price range.

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