Renting But Thinking About Buying
Renters, Are You Ready to Buy a Home?
You have been watching your credit score like a hawk, researching properties online, Binge viewing HGTV, and squirreling away every penny you can in anticipation of buying your first home. You feel you have a fair grasp of how the home buying process works (so you think), and you are juuuuust about to pull the trigger of dipping you toe in the water of "thinking" about buying a home. Did I just hit the nail on the head of your current mentality regarding the purchase of your first home? Don't feel bad if I did! You are preparing to make the largest investment of your life, an there SHOULD be a fair amount of anxiety that comes with that. Reading my Buyer's Guide will help answer a number of questions you might already have, as well as some you have not even thought of. In addition while you save up your down payment, take into consideration these 5 steps to get you closer to closing.
Buying a home is a process, and for renters planning to buy a home, preliminary steps like creating a budget and saving for a down payment are just a few plays in putting together a successful game plan in scoring your goal of owning a home. Here are five more advanced steps toward moving out of your rental and into a home of your own.
Understand the full cost of homeownership
As a renter, your monthly rent payment covers a majority of the monthly housing payment (minus utilities). But as a homeowner, four main factors go into your monthly housing payment: principal, interest, taxes and insurance (P.I.T.I.). Understanding these costs will help you determine how much house you can afford.
Together, principal and interest comprise your monthly mortgage payment, with the principal paying down your loan balance each month, and the interest paying your fee for borrowing the money. Use a mortgage calculator to determine how much of your payment goes toward principal versus interest each month.
Taxes refer to property taxes, which are assessed by the county you live in. In the Charleston, SC area taxes average about 1.2 percent of your home’s assessed value each year.
Insurance — paid to a homeowner’s insurance company of your choice — is required when you have a mortgage. Lenders require that your insurance cover the cost of rebuilding the home if it is ruined by fire or other disaster. This “replacement cost” is determined by your insurer, and must be agreed to by your lender. Insurance will typically cost $700 to $1,200 per year for a single family home.
In some cases there is a fifth monthly cost category: homeowners association (HOA) dues. These fees cover common area amenities, landscaping, ongoing upkeep of common areas. Most condo HOA's withhold reserves for future maintenance like roof replacement or exterior painting as well as exterior insurances . These monthly dues range from $60 for cheaper condos to $1,000 or more for luxury condos.
Single family home buyers can take a useful cue from HOA budgets, which generally require that at least 10 percent of dues go toward reserves. Even if you’re not buying a condo, it’s a good idea to set up a similar savings plan for future maintenance like replacing a roof or major appliances.
Know your homeowner tax benefits
Mortgage interest and property taxes are deductible when you file your annual tax returns, and reduce taxable income.
These deductions significantly lower your cost of homeownership. For example, for a $300,000 home with 20 percent down and a 30-year fixed mortgage at 4 percent, monthly P.I.T.I. is about $1,545. Tax deductions reduce this total housing cost to about $1,215.
Study "Rent - vs - Buy" math
Often, people judge the cost of renting vs. buying by comparing P.I.T.I. to a rental payment. But to get an apples-to-apples comparison, you actually have to look at the after-tax-benefit home ownership costs compared to rent costs.
Using the example above of a $300,000 home that costs $1,215 per month after taxes, you could compare this residence to a home that rents for about $1,200. If the $300,000 home was more spacious or in a more desirable area, the math would seem to favor buying — but don’t forget this example requires a $60,000 down payment.
Identify mortgages that fit your budget and timeline
If you don’t have 20 percent to put down, you can still get a mortgage with as little as 3 percent down. However, if your down payment is less than 20 percent, you’ll have to pay mortgage insurance, which is about .85 percent of your loan amount, and is not tax deductible.
Your monthly P.I.T.I. (which includes mortgage insurance) is about $1,995 on a $300,000 home with 3 percent down and a 30-year fixed mortgage at 4 percent. After tax deductions, this total housing cost drops to about $1,614. And you’d only need $9,000 for the down payment.
You can also lower your rate and P.I.T.I. with a shorter-term loan like a 5-year ARM, but rates on these loans will adjust in 5 years, so you risk having a much higher payment if you plan to stay in the home longer than that. One way to get around that is speaking with our preferred lender about plans to refinance in as little as 6 months.
Start preparing your credit score now
Credit scores are critical for getting the best mortgages with the lowest rates. Lenders want reliable on-time payment history as well as credit depth (number and diversity of accounts open).
More credit accounts are better, so renters with only one credit card should consider obtaining more credit like a car payment, personal loan, or line of credit. Just note that your credit score can drop 5 to 15 points when you first open a new account, then will come back up when you’ve established a good payment history after about 6 months.
Speaking with a REALTOR or mortgage lender is not going to kill you. I understand that you may be scared of rejection, but you will never know until you try. Even if you are not eligible for a loan right now, taking this important step will help you get a game plan together and better prepare yourself to become a buyer. Credit not so hot? Many lenders offer FREE credit repair programs, and have tools to help figure out exactly what you need to do to become qualified, so GET ON IT!
As the teams founder, Joe has set the standards of which the Charleston Trident Partners operate. Complete customer satisfaction is his pinnacle focus, which is evident in his work ethic and steadfas....
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