Okay, so I gave you some pros and cons of buying a house in Part 1. You seem to be feeling good and confident. That's great...... Tip : Keep your focus and don't be talking to too many people outside of the loan officer that you are speaking with. That's if you have picked one by now. And by this I mean don't ask in depth questions to your parents, friends, neighbors, etc, etc. There is a reason for this. Programs change yearly and so does the way of financing. The biggest thing, mortgage rates can change daily! What your friend received last week might be totally different the following week.
- This may sound simplistic, but first and foremost you should find a neighborhood and a home that you just plain like.
Number Crunching
Keep in mind that while home ownership provides security, it almost certainly won't give you the returns provided by equities. If history is any indicator, you can reasonably expect an 8% to 10% annual gain on your stock portfolio. Home prices, on the other hand, typically follow the rate of inflation over the long term which is usually 3% appreciation. Hence why it is sometimes good not to put as much down when buying your home. Your loan officer should be asking about your goals when talking to you. Don't work for your home, let it work for you.
Tip : Don't fall into the trap of hoping that what has happened (larger increases in values) the last 4 years happens to you. Just remember that over time, you will build equity.
RENT VS BUY WORKSHEET
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What is your current monthly rent? | $1,300 | |
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What is your expected yearly rent increase? | 1% |
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What is your federal income tax bracket? | |
28% | |
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What is the term of the loan in years? | |
30 years |
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What is the loan rate? | |
6.5% |
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How much do you expect to borrow to purchase a home? | |
$246,800 | |
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What is the expected property purchase price? | |
$250,000 | |
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What is the estimated annual appreciation of the home you expect to buy? | |
3% | |
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How much do you expect to pay in yearly property taxes on the home you expect to buy? | |
$5,600 | |
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How many years do you plan to live in this home? | |
5 |
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RESULTS
| Based on the information you provided, the following represents your costs and savings over the next 5 years. | |
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Estimated costs of renting: | |
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$79,576 | |
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Estimated gross costs of buying: (includes $4,176 in closing costs) | |
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$126,227 | |
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Estimated amount of tax related savings: | |
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$30,432 | |
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Estimated amount in increased equity: | |
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$47,845 | |
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Estimated net costs of buying: | |
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$47,950 | |
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Estimated total savings: (not including investment related savings) | |
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$25,516 | |
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Your total mortgage payment to include taxes, homeowners insurance, and mortgage insurance is :$2,161 / month
The worksheet shows that you will save $25,516 in 5 years which comes out to $5,103 / year. Should you buy? YES
***This worksheet had to be tweaked because it didn't allow for mortgage insurance. I also did this based on a FHA mortgage, hence the mortgage insurance is built into the loan amount.***
And keep in mind, this is using a rent of $1,300 a month. It all depends on the average rent in your area for that unit. And you need to compare the size of your rental and the property that you are purchasing. Also keep in mind that if your rent is more, your total savings would be less.
Post Purchase Tip : After you buy your home, just be careful of property scams!!!
***As stated before, there are many types of rent vs buy calculators. Not all of them are accurate because there are several factors involved. I couldn't copy the one I use. The one used is just average, but it still shows that buying is better than renting in this case.***
In regards to Part 3, I will give you examples of the different types of programs for those with money saved, no money saved, and those with less than perfect credit.
The First Time Homebuyer Series :
- First Time Homebuyer Tips : FHA, is the best mortgage program? -- Best Programs & Why -- Part 3 of 4
- Renting vs Buying -- Knowing your loan options -- Part 3 of 3
Buying Tips :
- FHA Loans - Conventional Loans - VA Loans -
Experience & Knowledge at its BEST !!!
____________________________________________________________________________________
For more information on FHA loans, please go to this link. The FHA Expert
For more information on how you can obtain your dream home, please click here : Mortgage Financing Options
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags !!!!!
Copyright © 2008 by Jeff Belonger
Jeff - as always, a very informative blog. I like your style; it reminds me so much of my own: just plain, simple and to the point. In the first time buyer workshops that I do here in Ventura County with some local Realtors, I always go into the "Renting vs Buying" scenarios using actual numbers and listings. I, too, tell prospects that the calculators on the internet don't seem terribly accurate. However, it is a challenge when we have to combat what everyone and their mother is also telling them.
"28 %"?
Wow! Think about how much better those numbers will look when BO raises taxes to 78%! That is if we're allowed to own our homes.
Well put, Jeff.
Sorry about the political comment, but there are only a few days left to protect the American Dream.
Bill
This is actually a great post. The numbers are the truest indicators. I know we only have a few days left to protect the american dream to William. I hate wealth redistribution.
Besides the FHA, I have many buyers using VA. In many of our areas USDA is also available.
Jeff - you hit a very valid point - here in my little town the average rent is only $750 to $850 - this means a higher mortgage than rent for most - but there are some great pros to buying -
DONNE...... . it definitely can be a challenge when everyone and their mother tells the current borrower something. Even those loan officers that just throw shit out there, without explaining to the client or educating them on the reasons to why. That even ticks me off even more, when they are given misleading info from a loan officer. I feel like a trout swimming up stream trying to explain the truth then.
Overall, I love stats and figures..... and thanks for those polite compliments...
WILLIAM...... . don't worry about the political comment... I guess time will tell... should we be keeping our fingers crossed?
LARRY...... . well, time should tell.... but thanks fo those kind words...
RANDY...... . yes, VA and USDA loans are very good also... and allow buyers to come up with no money down and still low rates. thanks
THESA...... . it's very important to try to explain their current rent and to what their new payment will be. It all comes down to their income ratios and possibly some reserves just in case... things do happen. thanks