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Real Estate / Houses

The Real Truths of the Buying vs. Renting a Home Debate — Arm Yourself With Sound Knowledge

Why Buying a Home Often Makes More Financial Success

BY Garrett Clayton/Promoted // 08.30.19

“You’re just throwing your money away if you rent.” It’s a saying most renters are all too familiar with, but the truth is there are reasons it makes sense for some people to rent. Maybe you aren’t sure how long you’ll be living in your current city, or perhaps you just moved to a new locale and need time to scope it out before committing to a neighborhood.

What you don’t want, however, is to miss out on the benefits of homeownership because of common misconceptions about buying a home — like you must be able to fork up a 20 percent down payment or that renting is always cheaper than buying.

Here, we’re taking a dive into the most common questions and misconceptions potential first-time homebuyers have about what it takes to buy a home and whether it makes financial sense for you.

The Great Debate: Is It Better to Rent or to Buy?

1. Affordability

When it comes to the affordability of buying or renting, the answer isn’t as straightforward as simply comparing monthly rental payments to monthly mortgage payments. That would be too easy, right?

Right. But it would also be too simplistic.

For starters, in addition to monthly payments, you need to consider other financial aspects involved in purchasing and owning a home. These include up-front items like down payments, home inspections and closing costs, as well as maintenance costs such as utilities, HOA dues and repairs. Renters don’t incur the costs for all these extras because, with the exception of utilities, landlords typically cover these types of expenses.

Young couple holding a white miniature house in living room
Buying a home is often a more financially sound decision than renting.

While you are probably thinking renting is the hands-down, no contest winner when it comes to costs, there are several reasons why buying a home is still in the game. According to Forbes, rent increases at a faster rate than income, meaning in a matter of years many renters can be priced out of their current residences.

Likewise, renters are at the mercy of their landlords who can increase the rent or terminate a lease with little to no warning. Those uncertainties can lead to other unplanned expenses, such as moving costs, security deposits and up-front rental fees often required to secure a new rental property.

2. Equity

Before we declare the W for either side, let’s discuss a little thing called equity. In simple terms, equity is the portion of a home’s value that the homeowner actually possesses outright. The rest of the interest in the home is possessed by the bank or lender who holds the mortgage loan. The more you pay down your loan (i.e. what you owe the bank or lender) the higher your equity in your home.

Equity is the reason renting is so often equated to throwing your money away. Because when you rent, your landlord takes your money and you say sayonara. In fact, Forbes asserts “renters may throw away over half a million dollars over their lifetime —  $1,500 per month for 30 years totals $540,000,” as stated by self-made millionaire and wealth management advisor David Bach.

When you buy a home, on the other hand, the money you put into it — both in the form of the down payment and your monthly payments (minus interest and fees) — translates into home equity. In other words, you keep a large portion of what you are paying on your mortgage in the form of the home’s value.

Equity is also the reason why you will hear buying a home referred to as an investment. If your home appreciates in value (which in a good market most do), your equity in the home will also go up and you will own a higher percentage of your home. Equity is also considered an asset and is part of your net worth.

It can’t easily be liquidated into cash, but it can be leveraged in a variety of ways to take out an additional loan, buy your next home, or even leave an inheritance for the next generation once the home is paid off.

So, while renting often costs less out-of-pocket in the short term, the long-term financial gains and stability buying offers often make buying a more financially sound decision.

Now on to an equally important topic:

What Do You Need to Make Your First Home Purchase a Reality?

Answer: probably not as much as you think. Yes, you do need money for a down payment and other up-front expenses like fees and closing costs, but those are not quite the barriers many potential homebuyers have been led to believe. The key is knowing what you can afford and selecting the mortgage program that best fits your unique financial picture (Spoiler Alert: a qualified mortgage professional can help).

1. Home Price Range

Knowing how much you can afford in terms of both up-front costs and monthly mortgage payments is an essential early step in the homebuying process. Financial experts typically recommend the 28/36 rule, meaning you keep your monthly note payments below 28 percent of your gross monthly income and your total debt, including other loans like car payments and student loans, below 36 percent, according to BankRate.

Many websites offer online mortgage or home affordability calculators to help you gauge what you can afford, but the best way to get an accurate estimate is to pre-qualify for a loan. By answering a few financial questions about your income, assets and debts, you will get a good sense of the amount you may qualify to borrow, which will help you set your price range.

We recommend getting in touch with a qualified mortgage lender, like AmCap Home Loans, at the beginning of your journey. With a vast knowledge of available mortgage programs and the entire lending and homebuying process, they can guide you through every step with expertise and ease.

2. Down Payment

We’re going to let you in on a little secret. Most first-time homebuyers can put down way, way less than 20 percent of the home’s value as their initial down payment. It all depends on the mortgage program you select. Some loans require as little as 3 percent down.

While a variety of factors determine which programs are available to you, a mortgage professional can help you sift through the details.

So why is 20 percent down the go-to percentage? Private mortgage insurance (PMI) is essentially insurance that protects the mortgage lender of conventional loans should the mortgage holder (you) stop making payments on the loan. It is generally required for all mortgage loans on which the buyer puts down less than 20 percent, which is why this percentage is often mentioned when buying a home.

However, once you’ve paid off enough of the principal on your loan to have at least 20 percent equity in the home, you may be eligible to have the PMI removed. So, even if you only put down 3 percent you still are not locked in to PMI for the duration of your loan.

3. Credit Score

As with the down payment, the required credit score varies by loan program. Which programs you qualify for are also dependent on your unique financial situation. As a reference point, most conventional loans require a minimum credit score of 620, but some programs have even lower minimum scores. Even those who don’t have a qualifying credit score right now would benefit from talking to a mortgage professional.

Their entire job is helping people qualify for loans to purchase homes, so they can offer advice on how to build credit or even save for a down payment.

Whether you are ready to dive in to becoming a first-time homebuyer right now, or just want to test the waters, the friendly and knowledgeable mortgage team at AmCap Home Loans can help.

For more mortgage knowledge and insights, go to www.myamcap.com or call 844-MYAMCAP.

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