Before You Buy a Home or Sign a Lease, Consider These Costs
When is the right time to buy a home? Should I continue renting? As your career progresses these are some of the inevitable questions you will undoubtedly ponder. In this post, I would like to highlight the costs that come along with both options that are important to take into consideration.
Should I buy a home?
The current mortgage rate on a 30 year fixed loan is around 3.63% and 2.77% for a 15 year loan term. In my discussions with realtors, they feel now is a good time to buy as the rates are low and likely to stay that way due to it being an election year. However, being a fan of being evidence based, I looked into the possible effects of election years on mortgage rates and found various reports that at the end of the day were not very conclusive. One report by Quicken found that;
Of course we can’t predict the future of national mortgage interest rates, but we can note that in three out of the five past election years we observe a slow (and small) but trackable decline in mortgage interest rates.
This was deduced from taking a look at mortgage rates from elections for 1988, 1992, 1996, 2000, and 2004. Other sources found mixed results, so its difficult to say one way or the other. Either way, the important take-away here is being able to find a favorable rate that will put your finances in a favorable position over the course of the mortgage. Below is a comparative calculator for rates:
Pre-purchase: There are various costs that come with choosing to go the home ownership route. Within the initial phase, you may want to have your potential home inspected. Home inspection cost and services may charge approximately $500 to do so. However, this is a wise expenditure as it will help find sources of health hazards such as mold or deterioration that you may have been unaware of. It is also wise to do your homework, by working with an independent appraiser to give you accurate estimate of the value of the home. Additionally be prepared for the fees associated with a credit check and filing of various applications. As for your down payment, it varies but but is generally in the range from 0 to 20% of the home value. Your credit may come into play, and it is estimated that lower rates from lenders start in the FICO range of 660 to 680 and up.
Ongoing costs: A home purchase, in addition to your monthly mortgage, may come with additional fees like dues to your home owners association, insurance and property taxes. However, the main unforeseen cost, is generally due to maintenance and renovation. Zillow estimates found that homeowners end up spending ~9,000 a year on home maintenance and unexpected costs.
Additional tasks: In maintaining a home not all tasks will directly translate into monetary funds. Indirectly, there is the cost of time that comes with home maintenance. The additional tasks of mowing, shoveling snow and other landscaping responsibility all add up. For some people yard work is a form of stress relief, but if you opt to outsource these duties just make sure to budget for it.
Potential savings: If you plan on being in an area for at least about 3 years or intend to be there for the long haul homeownership may end up saving you money. At the point of selling, there is the potential that you may recoup all of the recurring expenses if you are able to sell the home at a favorable price and its value has increased during your time in it.
Should I Rent an apartment/home?
Renting is generally a much quicker process, but unlike the potential of recouping your money when you decide to move the money paid in rent cannot be regained. With that said however, it still may be a better option as some of the unexpected costs that come with home ownership may ultimately come out to be a loss when all is said and done.
Upfront costs: These days finding an apartment doesn't generally require a whole lot of assistance or have to consult with a realtor, as there are plenty of free online services and platforms that allow you to compare apartments. The costs are usually for an application, deposit, and the cost of moving to the new location.
Ongoing costs: As a renter you are generally only responsible for your monthly rent and the cost of insurance. Your security deposit, generally covers damage that may be incurred at the point of moving out. As for maintenance, if you are lucky enough to have a good management team these issues are generally handled in a timely manner but this is not always the case.
Additional considerations: Although renting in and of itself is fairly straight forward, and someone generally maintains the lawn and shovels the snow, there are some additional considerations. You have to account for factors such as ambient noise and whether or not you live with or next to individuals with less than healthy habits like smoking.
Potential Savings: The money that would have gone to all the additional costs of maintaining a home could be saved and invested. If you happen to be a good tenant and leave your rental in good condition, you can also expect to receive your security deposit at the end of your lease.