Renting vs. Buying
(an overview)
Three key reasons why people choose to buy a home vs. renting a home
1. Profit/Tax Benefits
2. Stability/Predictability
3. Freedom (to do what you want to your home)
Three common misconceptions of people who have never owned a home
1. It’s not worth it (not enough profit to justify the risk)
2. “My credit is not good enough”
3. At least 20% down payment is needed
Misconception #1
There isn’t enough profit to justify risk.
Profit from Government Benefits:
The U.S. Government WANTS you to own a home and rewards you financially for being a homeowner.
1. It allows you do deduct mortgage Interest
2. It offers reduced rate loans and reduced down payments
3. It also allows you to have up to $500,000 profit tax free. (see IRS rules on this here)
https://www.ftc.gov/faq/consumer-protection/get-my-free-credit-report
Profit from equity building (paying down a mortgage and getting appreciation):
IF, instead of renting a home or apartment for $1500/month, you buy a $200K home instead, in 5 years you’ll be nearly $35,000 ahead!
(click here to go to the calculator on REALTOR.org and make your own calculations)
Now this graph assumes other things that can be altered. For example:
The downpayment for the calculations here is 20%. There are loan programs that allow you to put as little as 3.5-5% down. If everything else stays the same, but you only put 5% down ($10K) you still come out $28,000+ ahead after 5 years.
Profit from savings monthly (the payment on a $200K mortgage is in the $1000/month range):
(click images to enlarge)
$150K
$200K
$250K
Keep in mind also if you buy and have a mortgage interest deduction, you can change your withholdings to allow yourself to receive more on each paycheck… so you can get the benefit monthly to help you with your payments.
Misconception #2
My credit is not good enough to get a mortgage.
First thing is to find out your credit score. You’re entitled to one free report each year from each of the three main reporting agencies:
Experian
Transunion
Equifax
Click here to start the process of getting your credit reports
Let me first say here that there are alternative methods of financing for those with a credit score below 580. In fact, once you are looking at alternative financing methods, credit score can be removed from the process all together.
Once you find out your credit score (usually somewhere between 300 and 850), you can take steps to secure a mortgage if it is a good enough score (for Conventional financing you need a minimum score of 620 in most cases and for FHA loans the minimum is 580)
According to MYFICO.com, these are the things that effect your credit score and how much they do. If your credit score isn’t what you want it to be, contact me and I can help you work on improving it.
How a FICO score breaks down
Misconception #3
I would need at least a 20%
down payment.
ONCE YOU KNOW YOUR CREDIT SCORE, YOU CAN RESEARCH THE DIFFERENT LOAN PROGRAMS AVAILABLE TO YOU. THE BETTER YOUR CREDIT SCORE IS, THE BETTER CHANCE YOU HAVE OF GETTING LOW DOWN PAYMENT LOAN OPTIONS.
For Conventional financing backed by Freddie Mac or Fannie Mae, you need a minimum score of 620 and for FHA loans the minimum is 580
Conventional loans have down payments as low as 5% and FHA as low as 3.5%.
In addition, there are programs out there offering down payment assistance. Click here to learn more…
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