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First time home buyers have a lot to consider this summer when making the decision to rent or buy a home: interest rates are at all-time lows and prices are at or near their lowest in years.
Still, deciding whether to buy a home or rent an apartment can be a complicated decision. How do you know what’s right for you? Potential buyers should ask themselves several key questions before making this important decision.
1. What will monthly costs be, and can I afford the payments?
Keeping mortgage payments under 30 percent of your monthly income is a good rule of thumb. If you can’t keep mortgage payments below that, you may be better off renting for awhile.
2. What other debt do I have?
Total rent or mortgage payments plus credit obligations should not exceed 35 to 40 percent of monthly income. Talk to your lender and they will help you get ready to buy a home.
3. What is my credit score? Can I qualify for a good interest rate?
A high credit score indicates strong creditworthiness, and that qualifies you for better interest rates on a mortgage. Maxing out on your credit lines and paying bills late will lower your credit score. The impact of a credit score on interest rates can be significant. For instance, a borrower with a score of 760 could pay nearly two percentage points less in interest on a mortgage than someone with a score of 620. Lower interest rates also mean lower monthly payments. If your credit score is low, you may want to delay buying a home until you can improve your score. Work with your lender, they can tell you what to do to improve your credit score. Don’t have a lender? Ask your Realtor, they can refer you one or more lenders that they work with.
4. How much will taxes, monthly maintenance, or other fees cost?
Owning a home means you’ll have to pay real estate taxes and other costs like insurance and maintenance. On the other hand, owning a home brings big tax savings at the end of the year.
5. How many years will I stay here? Generally, the longer you plan to live someplace, the more it makes sense to buy. You’ll build equity in your home and have the satisfaction of knowing it is yours and you can paint or redecorate any way you want. There have also been studies that show children do better in school if the parents are homeowners.
If you need any help with this decision, your Realtor or Lender can provide you with a Rent vs Buy analysis form.