First Time Homebuyer Tips
By Steve Gillman - 2010
Ask a real estate agent for first time homebuyer tips and
he probably won't offer the first of the suggestions below, which
is to carefully compare the cost of renting to buying. Any loan
broker or real estate agent wants to believe - and wants you
to believe - that everyone should buy a house. I'm writing this
in 2010, after the bubble has burst, so I'm sure there are many
hundreds of thousands of people who now know it's not always
a good idea to buy a home rather than rent. If you had rented
since 2006 (the top of the market), you could now buy at a big
discount, which gets us to our first important suggestion.
Carefully Compare Renting Versus Buying
When buying costs significantly more than renting, it is often
better to rent and wait. In 2006, in Tucson, Arizona, a two-bedroom
house that rented for $750 per month cost about $1,250 per month
to buy, when you included the mortgage payment, taxes, insurance
and routine maintenance and repairs.That huge difference in costs
was a clue to the state of the very speculative market of the
time. If you did buy such a home then, by now you spent $24,000
more than renting would have cost, and the house is probably
worth 30% less than the day you closed.
Prices aren't the only important factor here. Whether it makes
more sense to rent or to buy also depends on interest rates.
A home with the same price can cost twice as much to buy with
a 13% mortgage loan (the going rate in 1984, for example) as
with one at 6% or less (we borrowed at 4.5% in 2009). Since rental
rates don't fluctuate as quickly as interest rates, it can sometimes
pay to rent and wait for them to go down.
Now, after the bubble burst, there are many places, like the
small Colorado town we call home, where it is cheaper to buy
a home than to rent one. Falling prices help, but the near-record
low interest rates are a bigger factor. Carefully compare rent
versus ownership costs to see if buying your first home makes
sense where you are.
Those making loans and agents selling houses have a bias in
what they want to sow you. A higher priced home means more money
for the real estate agent and loan broker. Ignore their formulas
that have you allocating 35% or 40% of your income to a housing
payments. Secure employment is less predictable than ever, and
you might have to make ends meet without a job at some point.
Keep your loan payment, taxes, and insurance to 30% or less of
your after-tax income if you want to be safe.
There is an exception to this guideline. It is when you would
otherwise have to rent for more than that amount. For example,
if renting an apartment will take 35% of your income, and you
can spend the same to buy a home, then it might make sense to
buy. Of course, you might also consider moving to an area where
rents or home prices are more affordable.
Look at All Costs
A first time home buyer often doesn't realize what it takes
to own and maintain a house. It is common for people to look
at just the most obvious and predictable costs, like the payment
and taxes.There are many other factors that determine your personal
cost to own a home.
A house that is ten miles further away from your job than
another, for example, can mean you'll pay $500 more per year
for gasoline, and spend an extra 150 hours per year commuting.
Each house is also a bit different in how much it costs to heat
it. Estimate all the real costs before you make the decision
to become a first time homebuyer.
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