Jon Coile, chairman of Rockville-based multiple-listing service MRIS, writes occasional commentary on the Washington area housing market.
It’s human nature to take our cues from the immediate past. So when the stock market soars, everyone feels good and thinks it’s going to soar forever. And when the real estate market slumps, as it did in recent years, people grow wary.
But with the recent rise in the cost of renting compared with the low mortgage interest rates for home buyers, is it better to buy or rent?
If you’re currently renting, now is a good time to look at what it might cost to buy a house. A lender can help you determine how much you qualify for and what price range you should be looking at if you want to keep your mortgage payment comparable with what you pay in rent. Renters might be surprised to learn that you may actually save a few hundred dollars a month by buying, plus you’ll enjoy the additional benefits of homeownership.
If you’re a veteran eligible for VA benefits, you can actually buy a home with less cash out of pocket than it costs to move into a rental with security deposits and rent due in advance. And if you qualify for a Federal Housing Administration (FHA) loan, you might be able to get into a home for a few thousand dollars more than it would cost to come up with that first month’s rent and security deposit.
When evaluating whether you should buy or rent, the first question you need to ask yourself is how long you plan to spend in the property. A general rule of thumb is that if you’re going to be there for only a few years, rent, don’t buy, because the closing costs of buying and selling will eat up your appreciation.
But if you’re going to be somewhere for at least five years and you keep renting, you may be making a big mistake. Your landlord is benefiting from you paying down his or her mortgage, and you’re missing out on an investment opportunity. There are many hidden advantages that come with buying that aren’t immediately apparent.
The first advantages are financial. If you’re a renter, your monthly payment usually increases every year. But if you’re a homeowner, it typically doesn’t change very much ever. You’re pretty much locking in a payment with today’s low interest rates — ones that will seem even lower in 15 years when your salary has increased with inflation. Even better, if you remain in your home long enough, you will eventually pay off your mortgage in full. And that’s a great way to head into retirement. You can sell the house in Arlington, go to Florida and buy a house in cash, and have minimal living costs.
The tax code is also heavily weighted in favor of homeownership. For example, if you buy a house and live in it for five years, it will likely go up in value. That gain in equity on your primary residence is yours, tax-free. But if you had bought a stock for the same amount, you would owe capital gains taxes on that increase. Then there is the mortgage interest deduction. Under current tax law, you get to deduct the interest you pay on the mortgage to purchase your home.
There are other benefits to homeownership that are slightly more difficult to quantify. When you own a home, it’s your castle, your very own piece of the planet. You can landscape the way you want, paint it the way you want, re-tile the old shower in the guest bathroom, and put as many holes in the wall hanging up artwork as you want. It’s your home. There’s something to be said for all that freedom. And if you’re concerned about having to be in charge of upkeep on things such as appliances and the HVAC equipment, a relatively inexpensive home warranty can cover those issues.
Alternately, waiting to purchase a home until you’re in a more financially stable position also has its pros. If you have big car payments, credit card balances and a lot of student debt, paying down your debts first might make more sense in the short term.
This other debt can affect you two ways — reducing your ability to qualify for more house and possibly reducing your credit score. In today’s world, credit scores have a big impact on your ability to obtain a mortgage. While putting more money down not only reduces the monthly payment, with a 20 percent down payment, mortgage insurance disappears.
Mortgage insurance is a monthly expense paid on a loan until the homeowner reaches 20 percent equity. But don’t disqualify yourself and think you can’t buy because you don’t have 20 percent for a down payment. You will need to seek out professional guidance for your particular situation.
As the market starts to appreciate again — and when it does, it has historically happened fast — finding a home that you love in your price range may be more difficult. Take a look at your finances now to see if buying a home is a plausible option and chances are you may be surprised by what you can afford.
Catch up with some of Coile’s previous columns: