Is Homeownership Right For Me?

By Robin Landsman, Wake County Extension Agent

This first in a 3-part series on homeownership will cover the consideration of renting versus buying a home, the costs associated with homeownership, and tips for making a smart purchase.

Interest rates are at historic lows and the housing market is a veritable buyers’ smorgasbord.  So everyone who can purchase is running out to purchase, right?  Not necessarily.  Homeownership is not for everyone.   Is the “American Dream” for you?

There are several things to consider when trying to decide if buying a home is the right choice.

First, consider advantages that homeownership offers:

Stability of monthly payments:  When locking into a fixed rate mortgage for 15, 20 or 30 years, you are guaranteed that your principal and interest payments will never go up.  However, taxes and insurance, when added into your mortgage through an escrow account, may cause your house payment to fluctuate over time. By comparison, rental costs over this same 15, 20 or 30-year period will almost certainly increase.  To help in this process, Missouri Extension has a very helpful on-line calculator.  You may find this useful as you work with clients as they make this decision:  http://extension.missouri.edu/p/GH5002

Tax benefits:  The interest you pay on your mortgage, along with the property taxes you pay each year, are deductible from your taxable income. As always, it’s best to talk with a tax consultant to get your full benefits.

Home equity:  Equity represents the portion of the home that you own and increases as you make monthly payments that reduce the outstanding loan balance. Over time, the home’s appreciation can increase the home’s market value your and help to increase your equity in the home. This equity can be used to secure a loan for other purposes, or can be converted to cash if you decide to sell.

Now let’s consider the downside to homeownership:

Maintenance:   The monthly cost of maintenance and utilities are normally more costly to the homeowner than to renter.  You are now the responsible party for maintenance and repairs.  As a renter, if you awake to find that there is no hot water for your morning shower you could call the landlord.  As a homeowner, it is now your responsibility to repair or replace the hot water heater.  There are costs in both time and money to maintaining the inside and outside of the home as well as the yard.

Relocating:   You may find it more difficult to relocate with the responsibility of a home.  Renters have the luxury of giving proper notice at the end of a lease, and they’re off.  When you own a home, it takes time to sell, or even rent, your home in today’s market. Additionally, you may find it difficult to find a lender in your new area willing to extend a loan for your next home without first selling or renting your current home.

Value:   And finally, there are no guarantees when it comes to the increase in value of your home. Unstable market conditions, wear and tear on the property and other factors could contribute to a decrease in value. Remember, you are primarily making a decision to buy a home in which to live rather than making a financial investment.

Homeownership is personal choice, and it is not for everyone.  To weigh the advantages and disadvantages these questions will help you determine your next move:

1. Do you know what you want in a home?  Have you thought about what you need?  Taking the time to learn about the steps involved in the buying process will help ensure that you purchase a quality home at a price you can afford.
2. Have you decided where you want to live?  Will you still want to live there in three or five years?
3. Are you ready for the financial responsibility?  Is your income secure?  Will your income change in the near future?  Consider whether your employment situation or occupation stable such that you expect steady income.
4. Is your financial house in order?  Do you have the down payment and closing costs saved?  Do you have an emergency savings account as well?
5. Have you done your homework in learning mortgage basics?  Do you understand the differences between fixed and variable mortgage rates and the implications of those differences?
6. Can you afford it?  Even if you have been pre-approved for a mortgage, you may not be comfortable with monthly mortgage costs for the approved loan amount.  The rule of thumb is that your total housing costs (mortgage, insurance, taxes) should not consume more than one third of your income.  It is perfectly fine to accept a mortgage loan in an amount that is less than for what you were approved.
7. Are you ready to take care of repairs and ongoing maintenance?

Homeownership is not a decision to make easily, even in a buyer’s market.  Being prepared by knowing what you want will help you make the decision that is right for you.

Resources:
http://www.Realtor.org / National Association of Realtors   “Field Guide to Buying vs. Renting”

National Core Competencies discussed in this post:
Borrowing, spending

Tags: Home Buying, Renting vs. Buying