Let’s face it, there are some very real advantages of renting instead of owning. Most of those advantages are related to a change of scenery. When renting, you have a choice of where you want to live, what you want to pay each month for rent and how long you want your lease for. For example, if you find a great apartment close to work, you can sign a 12-month lease.
A couple of months go by and you discover the pool and spa that you so admired are constantly in need of repair. The workout facility is too crowded and there isn’t enough equipment for everyone to use. When you renew, you discover that management has raised the rent. Again. That’s okay, because you know you can start searching for another apartment and move at the end of your lease.
At some point though, you start thinking about owning your own place instead of moving every six or twelve months. There might not be one single event that gives you the green light to buy and stop renting, but there are some things you need to ask yourself before you take the plunge.
Are you ready to stop renting? That’s going to be the most obvious yet there won’t be a clear answer at the outset. If you ask yourself if you’re ready to own and stop renting, you may have already crossed that threshold. First time home buyers find that they gradually transfer from renting into owning. It’s a gradual transition but just asking yourself if you’re ready to buy is a solid signal that you are. Yes, it’s a big step and yes, buying your own place will most likely be the biggest financial commitment you’ll ever make, but all home owners have been there, too.
Next, have you considered all the monthly costs involved? When lenders review loan applications they also look for what is referred to as cash reserves. Cash reserves is money left over after the loan has closed as well as how much discretionary funds borrowers will have each month after paying the mortgage. This is important because there’s more to take care of than just the mortgage payment. You’ll have property taxes and insurance to pay. Then there are the utility payments. Water, electricity and general maintenance are recurring expenses. In many rental agreements, an enticement called “All Bills Paid” is a common freebie. You pay your rent each month and the management takes care of everything else. Well, that’s not exactly true. The rent you pay does go toward utilities but it’s the management that pays them directly. When you own, there is still an All Bills Paid but it’s you that pays them. You’re the management.
Finally, do you know what type of financing you’ll need? This comes from a conversation with your loan officer. There are plenty of financing options and each has its own set of pros and cons. If you’re a veteran for example, then a VA loan might be your best choice. Maybe you’re looking for a low-cost loan and the FHA program stands out. How much will you need for a down payment? How much will closing costs be and who pays for them? You’ll need to make sure you have enough available funds for your down payment and closing costs and don’t forget you’ll also need to have set aside a certain amount of cash reserves. Your loan officer will provide you with all the details but once you get a solid estimate of your cash-to-close requirements, you can begin saving for them.
These are the three most important questions you need to ask yourself. Are you ready to explore owning? Have you considered all the associated, recurring costs involved and have you thought about the type of financing you’ll need? Once you can comfortably answer these three questions, you’re soon on your way to your first home.