About UAEX Money Blog:
UAEX Money Blog is a free, educational resource provided by the University of Arkansas Division of Agriculture Cooperative Extension Service. UAEX Money is managed by Dr. Laura Hendrix, an accredited financial counselor.
The goal of UAEX Money is to create easy to understand, research-backed blog posts that can improve the financial lives of Arkansans. Because of its association with the Arkansas government, blog posts must be digital accessible to those with limited vision, dyslexia, and other disabilities.
Tracking Down the Right Home Part 1: Buying vs Renting Which Path to Take?
Is your family ready to take on the responsibility of owning a home? Or does renting give you and your spouse the flexibility you need? Choosing whether to buy a house or pay rent is a major financial decision. Housing is the largest budget item for most families.
To make an informed decision, establish whether buying a house or renting suits your household’s needs.
As for choosing when it’s best to buy a house, researching the housing market and double-checking that your family can commit to taking care of a house is important to determine before you finalize your decision.
What’s Necessary?
Start with creating a list of your household’s needs. Use these questions below as a guide in creating a list of your family’s living requirements.
How many people are in your family? Do you expect the size of your family living in your home to change in the next three years? In 10 years?
How old are the people in your family?
What are your family members' habits, values, and goals?
Is your household’s income stable?
How much can your family invest comfortably without worrying about loss?
How many bedrooms does your family need?
How much storage space is enough?
How far are household members willing to commute to school, work, and other activities?
How long do your loved ones want to live in a certain area?
After you have written down or typed your household’s living requirements, review this list with your family. Because people have different habits, values, and goals, everyone might not agree on what is needed. Compromises may be called for. Your family may need to talk about which needs are high priorities and which are not as important. High priority needs can be marked with a star on your list.
Advantages Of Renting and Buying
Following your family’s list of living requirements, compare this list to the strong points of renting and buying a house. If your household’s living needs go with the benefits of buying a house, then buying a house is likely in your family’s best interest.
Advantages of Renting
Lower upfront costs
Your household doesn’t have to pay property tax which can fluctuate
Repairs are your landlord’s responsibility, not your family’s
Can move faster and cheaper depending on your household’s organizational skills and when your lease period is over
Renter’s insurance costs less than homeowner’s insurance
Advantages of Buying
Can save money over time and manage an investment asset
Loan interest and property tax can be tax deductible
Can customize space more extensively such as remodeling your kitchen
Less restrictions on pets and noise – however, if you live in a neighborhood with a Homeowners’ Association (HOA), they may expect your household to pay fees and follow their rules.
Improve your credit score by paying your mortgage payment each month – a mortgage is a special type of loan designed to help you buy a house.
The Housing Market
Now that your family has set renting or buying a house as a financial goal, the housing market might influence when it’s best to buy or rent.
Use this guideline for the housing market:
Rental costs are relatively low when the monthly rent is 0.5% or less of the house's market price. For example, renting a $100,000 property costs $500 per month. In this scenario, buying a house would be a terrible purchase from an economic standpoint and renting is the better option.
Renting also pays off if housing prices are consistently flat – meaning when the annual gain in house value is less than 2% or is consistently less than the inflation rate.
On the other hand, when rent is 1% or more of the house’s market price ($1,000 monthly rent on a $100,000 home), then buying the house is likely a good choice in the long run.
If house values are rising over the years – meaning annual gain is 2% or more and over the inflation rate – then buying a house may be a profitable investment and help your family save money over time.
Time and Money
Along with the housing market, the most important indicators as to when it’s best to buy or rent is money and time. Before buying a house, make sure your family has enough money now and in the future to take care of your house. For renters, double-check that your family can cover the costs during the lease period.
How much can your household pay for housing each month?
Aim to spend 25-30% of your family’s net monthly income on housing expenses such as rent and renter’s insurance or a mortgage payment, fluctuating property tax, and homeowner’s insurance. Your household's monthly housing expenses and other installment debts should not be greater than 33% of your net income.
Think about how your family’s change in housing will impact your monthly expenses. Is your dream house far away from your workplace? This might increase your commute time and car costs in your monthly budget.
How long will your family be able to stay?
Stay in your house at least three to five years to recoup closing costs, build equity, and increase its value as an investment.
For families that prefer renting, stay for your agreed upon lease period to avoid paying penalties for leaving early.
Does your family need more time to save?
If you and your family don’t have enough money now to take care of a house or move into a rental unit, then make housing a goal to start saving for.
You might delay the home buying process so that your family can save more money for a larger down-payment. A down-payment is a percentage of the house’s price that you pay upfront on a mortgage.
Another reason to delay might be that your family wants the ability to immediately pay for the full price of the house so that you can avoid dealing with a mortgage.
You may want to pay off your debt and improve your credit score before buying a home. This can get you a better deal on a mortgage.
Before renting, make sure your family can pay for the security deposit on a rental unit.
Emergency Fund
Both renters and buyers need to start or continue to put money in your household’s emergency savings account. Emergency savings help your family prepare for the unexpected, such as a parent getting laid off a job.
Save at least two months’ rent or mortgage payments and other monthly expenses. If you’re interested in buying a house, your family’s emergency fund will need to cover house maintenance and repairs.
Renting vs Buying: Choose What Works for Your Family
The housing question is an important personal and financial decision. Both paths have strengths – with buying, your household can enjoy managing a long-term investment and fully customizing your home. With renting, your traveling family can move easily to new communities across the United States. After reviewing these key points, you and your loved ones are on your way to making an informed choice on whether it’s best to buy a home or pay rent.
Tracking Down the Right Home Part 2: Finding a Mortgage (For Buyers)
Unless you plan to pay for one hundred percent of the house upfront, most likely you will need to get a mortgage to help cover the cost. A mortgage is a special type of loan designed to help you buy real estate such as a house or land.
With so many mortgage options and so much financial terminology, it can be easy to lose your way. But, if you have a strategy, tools, and the relevant information beforehand, you can choose a mortgage plan that works for your family now and in the future.
Many married couples choose to share ownership of their house – known as joint-homeownership and co-ownership. If you and your partner are interested in purchasing a house with a mortgage, carefully talk about each step of the process together.
Check Your Credit Score
Before you start shopping for mortgages, check your credit report or score first. A credit score is a number that describes your history of paying back money you borrowed.
A good credit score shows that you are more likely to repay the loan and helps convince a lender to let you borrow money at a lower interest rate. An interest rate is the cost you pay for borrowing money. Interest rates are a percentage of the money borrowed. If you have a low credit score, you may want to increase it before you shop for a mortgage. Most lenders require a minimum credit score of 620 for mortgages. Scoring models typically range from 300-850. High scores are better. For tips on improving your credit score, check out Build Your Best Credit Score
You can get a free credit report each week from one or all of these companies – Equifax, Experian, and Transunion. Reports are free, but there is usually a cost to see your credit score. Check out AnnualCreditReport.com for more info.
What Can I Buy Without Breaking My Budget?
Buying a house with a mortgage is a major legal and financial agreement. Before agreeing to buy a house with a mortgage, make sure your family can afford the monthly payments for the duration of the loan.
Assess your spending habits, monthly expenses, income and savings goals. Monthly housing expenses should be at or less than 25-30% of total monthly income. First-time home buyers should not pay more than two and half times their annual gross income on housing expenses.
It’s important to decide what your down-payment will be. Along with an interest rate, part of your mortgage agreement includes a down-payment. A down-payment is the amount of money you pay upfront for something bought using a loan.
Agreeing to a down-payment of at least 20% increases your chances of a lender accepting your mortgage application. For a 20% down-payment of a $200,000 home, you would need to pay $40,000.
You also need to decide how long your mortgage will last. In the United States, most homebuyers choose 30-year mortgages. You can also opt for mortgages lasting 7, 20, or more than 30 years. Interest rates are usually lower on short-term loans.
A mortgage loan calculator can help you look at estimates of monthly payments for different loan durations and down-payment amounts.
Don’t forget to examine house-related expenses’ impact on your monthly budget. Common house-related expenses include homeowner’s insurance, property tax, homeowner’s association fee, utilities such as gas, water, and electricity, home assessment, yard tools, maintenance, new furniture and moving service.
If you and your family think house-related expenses don’t work with your monthly budget, then delay the home buying process and set buying a home as a financial goal to save towards. Your family might save money for a larger down-payment or for paying the full price of the house upfront to eliminate the need for a mortgage.
What Mortgage Plans Can I Choose From?
After deciding how much money you can portion out for buying a house, it’s time to start researching different mortgage lenders.
It’s important to understand the difference between fixed-interest mortgages and adjustable-rate interest mortgages. A fixed-rate mortgage means your interest rate will stay the same for the duration of your loan. An adjustable-rate mortgage (ARM) means your interest rate can change based on an index. An index measures the interest rate trends in the economy. Your interest rate can increase or decrease based on this index.
Because the future can be difficult to predict, fixed-rate mortgages are recommended as the safest choice.
Keep in mind, the longer the loan, the lower the monthly payments. Shorter-term loans have higher monthly payments, but the interest fees are typically lower, meaning the total cost of the mortgage is lower. Shorter-term loans can save thousands of dollars in interest over the life of the loan.
Search for reputable banks and credit unions. Make sure it’s an FDIC-insured institution. It’s also good to contact a local bank. Ask to speak to a lending officer at the bank or credit union where you currently have a checking and savings account. This gives you the advantage of knowing what working with this bank or credit union is like.
A lending officer has an expert understanding of the mortgage the financial institution offers. They can answer your questions about the terms and conditions of the mortgage and help you with gathering the paperwork needed to apply for and accept a mortgage offer.
Compare mortgage terms and interest rate options from several lenders to make sure you are getting the best deal.
Here are key points to jot down and talk about with a lending officer as you search for a mortgage:
What is the duration of the mortgage?
Can I pay off my debt earlier than expected without penalty? This allows you to pay off the mortgage sooner and save money on interest. When possible, you can pay more than the monthly mortgage payment.
What is the interest rate?
Is the interest rate fixed or ARM?
Do I want to pay points? Points are initial fees that decrease your interest rate.
What is the down-payment?
If my down-payment is small, do I need to pay for private mortgage insurance (PMI)? Some lenders may require mortgage insurance. This covers them if you don’t make monthly mortgage payments.
How much are the monthly mortgage payments?
Will the monthly payments change over time?
Are property taxes and house insurance included in my monthly payment?
What other fees are there? Some fees may include settlement services such as loan origination, title, survey, appraisal, and more.
Do I want to pay my lender for settlement services? Or can I get a better price elsewhere?
Does the information the lender told me match the loan offer and what I reviewed online? Make sure your potential lender is trustworthy before agreeing to anything and sharing sensitive financial information.
Don’t be afraid to negotiate with a lender on the terms of the mortgage offer but be careful. A lender might lower one fee and increase another.
House Loan Programs
As a homebuyer, you might qualify and apply for a special mortgage program. The Federal Housing Administration (FHA) offers loans to first-time home buyers, seniors, and homebuyers with low or moderate income. Each state has its own housing finance agency. Arkansas’s Housing Finance Agency offers programs similar to the FHA.
The Veterans Administration (VA) offers home loans to servicemembers and veterans, and the United States Department of Agriculture (USDA) offers mortgages to homebuyers living in a rural area. There are programs for firefighters, emergency medical technicians, law enforcement officers, teachers, and energy-conscious homebuyers that want to lower their environmental impact.
For more information on special house loan programs, check out USA Government’s Home Loans
Get a Prequalification or Preapproval Letter
To help speed up the process, get three prequalification or preapproval letters from your top lenders before you start looking at houses.
A prequalification or preapproval letter estimates how much money you can borrow from the lender and the interest you’ll pay. This letter proves you are a ready buyer, but it does not guarantee that you will accept the mortgage offer.
If letters are requested and received within a short period of three months, it will not greatly affect your credit score.
Finding the Best Mortgage
Researching different mortgage options is a critical step in the home buying process. Next you will need to find a house your family likes that fits within your budget and get the documents that prove the seller will sell the house to you. Afterwards, you can solidify your best mortgage offer by officially agreeing to and signing the mortgage contract with your lender. The effort you put into finding a mortgage can save you money and give you peace of mind down the road. By evaluating your family’s financial situation, comparing lenders and loan programs, understanding terms and conditions, you can find a mortgage that works with your family’s needs and long-term goals.