The thought of buying a home is a daunting idea to some individuals. The housing crisis, in the years 2007-2008, has changed a lot of today's potential "home-buyers" into "home-worriers." Some believe that they will become a victim of the costs of home ownership and/or they will lose their capital investment, potentially. In contrast, owning your home is part of the American dream. You can build equity, over time, in owning your home. The tax breaks and benefits of home ownership are incomparable to rent. As a result, one may ask, "which is the better financial move: owning one's home or renting one?" In short, the answer depends on your location, the real estate market environment, your family circumstances, and your lifestyle preferences.
Among the external pressures of buying and owning a home vs. leasing a home, there is a significant financial figure that one needs to consider in such a debate. The price to buy and own your home can be costly. Before you decide to buy a home, you should know that there are several upfront, closing, recurring costs, and ongoing one-time costs. In order, such costs that one will have to pay to own one's home are:
Earnest Money Deposit (EMD) - a deposit made into a joint escrow account, between the seller and buyer, showing the seller(s) that you are committed and have good faith in the transaction; which, this deposit helps fund your down payment. Depending on the seller's preference, this amount typically ranges from 1-3%.
Down payment - a percentage of the full agreed purchase price that you pay upfront, typically at closing. In some cases, this payment is not refundable if the deal falls through. Your down payment varies depending on the loan product you choose. This deposit, typically, is as low as 3% to above 20%.
Home appraisal - A professional appraiser will come on site to evaluate the market value of your home. Such factors an appraiser would use to value one's home are based on location, amenities, structural condition, and recent sales of similar local properties. Depending on the size of the lot and home, an appraisal will cost typically from $300-$1500, which is commonly collected at closing.
Credit report fee - a fee that the buyer pays for his/her credit to be pulled from their financial lender. This cost ranges from $15 - $45 per applicant, at the time of closing the purchase transaction.
Home inspection - designed to identify observed material defects within specific components of the subjective dwelling. This inspection is completed by a trained licensed home inspector. The visual examination is non-invasive and has an upfront fee of approximately $75 - $250 per each home inquiry.
Loan origination charges - charges by a lender for processing a new loan application; which, such charges are quoted as a percentage of the total loan amount and are generally between .5 - 1% of your initial mortgage balance. This charge is collected usually at closing.
Flood certification fee - an assessment to determine whether the subject property resides in a flood zone. This fee is part of the closing costs when you are originating your loan. If your home is found to lie within a flood zone, flood insurance will be required before you can close the purchase of your home.
Lender's and owner title insurance - Lender's title insurance protects your lender against problems with the title to your property; whereas, owner title's insurance protects you from someone potentially suing you indicating that they have a claim against the home from before you purchased it. In example, previous home owner's failed to pay taxes, or from contractors who say they were not paid for work done on the home before you purchased it.
Escrow and title fees - services provided by escrow and title in conducting the transaction of the purchase of your home.
Recording taxes - charged by the city and county governments to record the purchase of your real estate, so it becomes a matter of public record.
State and local transfer taxes - Taxes imposed by states, counties, and municipalities on the transfer of the title of real property within the jurisdiction.
Other closing fee's - Some other additional costs to purchasing your home may be adjustments to HOA dues, county taxes, and first month's mortgage interest.
Moving costs - This cost will be the same as renting. For this reason, we will exclude this costs for comparison purposes.
Loan payments - If you choose a fixed-rate mortgage, your payment remains constant over the life of the loan. Alternatively, if you choose an Adjustable Rate Mortgage (ARM), your rate is variable, depending on the term, and is attached to a certain index + a margin for your lender. Thus, the ARM option has a variable payment.
Property taxes - a percentage of the assessed value that you will need to pay to the local government either bi-yearly (due in November and February) or yearly on one lump-sum basis. Each city may have a different tax rate, so please contact your local tax assessor for more information regarding your tax rate. A side note: the assessed value is different than the appraised value of your home. The assessed value is determined by a local tax assessor to determine the value of your home for tax purposes; whereas, the appraised value is the market value of your home in that one point of time.
Homeowner Association (HOA) dues - a monthly fee that is paid by the owner, on certain dwellings, to maintain and improve the properties in the association.
Mello-Roos - a monthly fee that is paid by the owner, in special districts, for public works and some public services.
Homeowner's insurance - a yearly premium, which can vary year to year, to protect your home against damages to the house itself, or the possessions in the home.
Private Mortgage insurance (PMI/MIP) - a monthly fee, calculated as a percentage of the loan amount, that is paid by the owner to protect his/her lender against a loss if the borrower defaults. The more you borrow, the higher your PMI will be.
Utilities (water, gas, electric, garbage, and recycling) - As a homeowner, you are responsible for paying all utilities and local services on your property. These costs vary widely by usage and location.
Maintenance and repairs - You are responsible for any and all home maintenance and upkeep costs. Typically, a rule of thumb, you can expect to pay .5% - 1% of your home's value, per year, to up-keep your home's value.
Renovation projects - one-time costs to restore, revive, or refresh your home's external and/or internal appearance.
Subject to conditions of the local real estate market environment and the negotiations on the purchase of your home, the seller may agree to pay a portion or all of your closing costs. Before making an offer, ask your real estate broker/agent whether it is realistic to expect the seller to share or cover the closing costs in your current market.
In comparison, someone who decides to rent does not have to pay a lot of money upfront to move into a new home. In order, such costs that one will have to pay to rent one's home are:
Security Deposit - The owner, landlord, of the home, can and will require a security deposit, up to two months’ worth of rent for an unfurnished home and three months’ worth of rent for a furnished home, to insure against any property damage, delinquent rent, broken leases, and other incidentals.
First Month’s Rent - In addition to your security deposit, many landlords will require first-month rent upfront. Rent can be prorated depending on your lease start date and move-in date.
Monthly Rent - Unless you live in a rent-controlled community, your rent can increase when your lease term expires and a new lease agreement is signed. Whereas, if you decline in signing a new lease agreement, you might receive a notice to terminate your tenancy with your landlord; which, in this case, you will be subject to the new lease term and payment with a new landlord, plus additional moving costs.
Pet Rent - Rather than a pet deposit, some landlords may charge a pet rent. This payment helps protect the landlord for any pet-related wear and tear over the tenants’ term on the lease agreement.
Renters Insurance - may be required by your landlord. Renters insurance protects the tenant against a loss(es) due to theft, fire, and other perils. Renters insurance cost is calculated based on the value and nature of the insured property, deductibles, and the amount of coverage.
Washer, Dryer and/or Refrigerator - Many rental properties do not include a washer, dryer, and/or a refrigerator. In such instances, a tenant will need to buy such items, upfront; which, these items can become costly.
Utilities - As a tenant, you may be required to pay a portion or all the utilities and local services to the property you are leasing. These costs vary widely by usage, location, and on the agreed coverages on your lease agreement.
Advantages of Buying
1. Homeowner's can build equity over time by (1) paying off their principal balance on their mortgage, (2) their home can appreciate through external economic forces, (3) and through judicious investments in home improvements, a homeowner can increase the overall value of his/her home.
2. Tax benefits - You can deduct your property taxes, interest paid on your mortgage, and your PMI premium (depending from year to year). More specifically, if your Adjusted Gross Income (AGI) is above a certain benchmark, and depending on new tax laws, your PMI premium may or may not be deductible. Please consult with your tax advisor, or CPA, regarding this deduction on a yearly basis.
3. Potential for rental income - You may turn your primary residence into a rental property, where it becomes an additional source of income. Your rental income can partially or completely pay off your monthly obligations of Principal, Interest, Taxes, and Insurance + HOA, if applicable, (PITI + HOA).
4. More creative freedom - Provided that you do not violate local building codes or homeowner association rules, you can paint your walls, change the bathroom fixtures, update your kitchen, or change the carpet to your hearts satisfaction - you may decorate your home to however you please.
5. Sense of belonging and community - As you stay longer in your home, you start to create a community and instill roots in your neighborhood; whereas, renters may forgo this option as they know they will be moving in a year or two.
Disadvantages of Buying
1. High upfront costs - As mentioned above, the total upfront costs in buying and owning a new home is a lot more than the relatively low upfront cost in renting.
2. Responsibility for maintenance and repairs - As a homeowner, you are solely responsible for the upkeep, maintenance, and repair costs to your home.
3. Potential for financial loss - If your home value decreases or remains constant during your time as a homeowner, where the appraised value of your home is decreased, you risk a financial loss if you need to or decide to sell during this period of time.
4. Most homes are not sold furnished - Unless your previous home was similar in size and floor plan layout, you will need to spend time, money, and energy in purchasing new furniture for your newly purchased home.
Advantages of Renting
1. No exposure to the real estate market - Home values can decline over time. As a lessee, this is not your concern - it is your landlord's.
2. No responsibility for maintenance or repairs - As a tenant, you are not required for the upkeep, maintenance, or repair costs of one's home.
3. Credit requirements are generally less strict - Lenders have higher credit standards to lend to borrowers; whereas, homeowners have lesser requirements to rent out their homes.
4. Some utilities may be included - Many landlords will over the HOA dues. Furthermore, most or all utilities may also be included in your rent payment. This practice is less common, but still possible.
5. Relocating is easier (if you have satisfied the lease term) - and less time consuming in comparison to owning a home and relocating. Otherwise, breaking your lease could have serious consequences: you could be required to pay the rent for the remaining months on the lease, your landlord can take legal action, and/or your credit report can be impacted.
Disadvantages of Renting
1. No equity is being built- Unless you have a lease option to purchase the home, every month pay in rent that money is gone completely.
2. No federal tax benefits - Tenants are not eligible for any housing-related tax deductions or credits. This shortcoming can raise your federal tax bracket in which forces you to be obligated to pay a higher tax amount.
3. Limited control over ongoing housing costs - Unless you live in a rent-controlled neighborhood, your landlord may increase your rent once your existing lease agreement expires. This can cost you more than what it would have cost you if you bought a home on a fixed rate mortgage plan.
4. Limited housing security. - While certain jurisdictions have generous renter protection laws, a landlord can terminate a lease if the existing lease agreement was satisfied, adequate notice has been provided (typically 30 or 60 days), and/or the landlord has sold his/her home. In contrast, homeowners do not face such uncertainty. As long as homeowners remain current on their mortgage payments and tax obligations, they can remain in their home as long as they would like.
Here is a link to a versatile calculator that will help you realize how quick your break-even point will be (the financial costs and time associated) from buying your next home vs. leasing (http://www.realtor.com/mortgage/tools/rent-or-buy-calculator/). Although such a calculator is available to help you decide what makes the most financial sense in a particular situation, this calculator cannot help you evaluate all the non-financial variables that ultimately affect your decision. Keeping an open mind, you and your loved ones should make the final choice to what suits your family needs. Remember, this is a choice that should not be rushed where you might come to regret.
If you are deciding on whether to buy or lease your next home, please contact one of our REALTORS® at: Info@MoaddabRealty.com or (949) 424-7282 so we may further assist you!
P.s. Can you find the four four-leaf clovers in the picture above?
* All information contained on this page was obtained from sources deemed reliable but is subject to errors, omissions, changes or withdrawal without notice. No warranty, express or implied, is made or should be assumed regarding the accuracy, adequacy, completeness, legality, reliability, merchantability or fitness for a particular purpose of any information, in part or whole, contained herein, and should be independently verified. Moreover, Moaddab Realty makes no representations or warranties, express or implied, with respect to future market conditions or any report, study, finding, recommendation or other information provided by Moaddab Realty herein. All material is presented with the understanding that Moaddab Realty shall not be deemed to provide legal, accounting or other similar professional services. Equal Housing Opportunity.