Home Buying vs. Renting
From your credit score to your handyman skills, see what makes the list of important considerations
If you’re pondering whether now is a good time to stop paying rent and begin applying for a mortgage, it can be difficult to read the signs in the Arizona housing market.
According to The New York Times, 2014 home prices in Arizona remained 30-40 percent below the heady highs of 2006, even after accounting for inflation. However, in metro Phoenix, builders cut their new home sales predictions to more moderate levels, based on the area’s slower-than-expected job, population and wage growth in 2014. RL Brown Housing Reports reduced its forecast to 12,000 new-home sales for 2015.
This mixed message of lower home prices, but slower home sales, can muddy the waters when it’s time to make a decision. Rather than trying to time the market, looking at your personal financial picture and preferences may yield a better answer to the question: Do I want to rent or buy a home?
1) Your financial picture: High credit score + low debt ratio = buy
A credit score of at least 620 or higher will help you qualify for a mortgage. If you boast a score of 740 and above, you are more likely to qualify for lower interest rates – a valuable bonus. Find out your score by requesting a free credit report from the credit bureaus at www.annualcreditreport.com or www.gofreecredit.com, and be prepared to pay about $20 to obtain a one-time “snap shot” of your credit score from MyFICO.com. If your score is low, renting until you improve your credit history is a worthwhile consideration.
Lenders also pay close attention to your income in relation to your debt when considering you for a mortgage. Your debt ratio is the minimum payments on all outstanding debt compared to your gross monthly income. Most lenders will hesitate if your debt ratio exceeds 41-45 percent; a 50 percent debt ratio is considered high.
2) Which one are you – saver or spender?
Is your piggybank always fat? That’s a great home buyer/homeowner trait because buying requires a large cash investment upfront and an ongoing budget for maintenance, in addition to paying the mortgage, taxes and insurance. While securing a rental property typically calls for a security deposit and one to two months’ rent, buying a home requires a deposit when you make an offer, which can range from $500 to as much as 5 percent of the sales price.
Additionally, a down payment on the home can be as little as 3.5 percent of the home price with an FHA-insured mortgage or as much as 5-20 percent with a conventional loan. Don’t forget closing and moving costs, any inspections that need to be done, and repairing or replacing worn appliances, if the home is not new. If you’re not handy around the house, we suggest saving approximately 5 percent of the purchase price for professional repairs and maintenance.
Prefer your cash more liquid, calling the super to fix whatever is broken and not being bothered with paying taxes, insurance and homeowners’ association fees? Then renting is the better scenario.
3) Not going anywhere for a while?
Money considerations aside, let’s look at your personal situation. Having the freedom to change addresses due to jobs, relationships or sheer boredom makes renting more attractive. No, you will not build equity, be able to write off home expenses at tax time or customize your rental property, but you can vacate with very little notice or financial consequence.
When you own your home and need to move shortly after moving in, you risk selling at a loss. Real estate expert Elizabeth Weintraub says your home needs time to appreciate in value, at least as much as the value of closing costs, so you can break even.
Granted, no one knows what the future holds, but if your income is solid, your moving plans are nil and you look forward to the permanency of being in the same neighborhood for a good stretch, buying is a better option.
Several online calculators, such as those on Trulia.com and NYTimes.com, are available to help you crunch the numbers, but other factors are simply personal choices. If you’ve decided that now is the time to make the switch from renting to buying, you can apply online, visit your nearest branch or call 602-433-HOME (4663) and let us evaluate your mortgage situation and opportunities.