Renters' Guide: Trading Rent for Mortgage Payments
Some people are happy renting indefinitely to avoid the financial obligations associated with homeownership and to enjoy the benefits and flexibility of renting. For others, renting is a stepping-stone to homeownership while saving for a down payment, waiting to buy a home with a spouse or life partner, or delaying until one's career is stable. Before trading in rent for a mortgage, a few factors should be taking into consideration.
The first thing to consider is whether or not homeownership is something you aspire to – do you really want to buy a home? As mentioned, some people prefer the simplicity of renting and may not ever want to buy a home. Lifestyle, family, debt load, job stability and the likelihood of a move to a different area are all factors that should be considered before making any decisions. (For more, see To Rent or Buy? There’s More to it Than Money.)
Just like the standard investing advice "buy low, sell high," renters-turned-buyers may be able to time a home purchase to take advantage of a real estate buyer’s market. Following the economic crisis of the late 2000s, for example, many homes sold for well below their pre-2008 prices. While this was devastating to sellers, it provided an opportunity for many people to get into homes for much less than they would have thought possible.
Real estate markets fluctuate in reaction to a variety of factors including global, national and local economic conditions, as well as tax incentives and interest rates. If you have the flexibility to wait for favorable buyers' markets, you may be able to take advantage of reduced prices and lower interest rates. (For more, see Seasons Impact Real Estate More Than You Think.)
Depending on the type of property and loan type, a down payment may range from about 3% to 20% or higher. For example, lenders may require up to a 50% down payment on certain condominiums that are not on the FHA-approved condominium list. If you’re considering buying at some point in the future, it’s a good idea to figure how much down payment you might need – and start setting aside money each month to reach that goal.
Rent vs. Buy Calculators
An internet search for "rent versus buy calculator" brings up several financial websites where you can find out if renting or buying makes more financial sense in your real estate market (just remember, the calculators are intended for general information and educational purposes). Rather than providing a definitive answer, the calculators can give you an idea of overall expenses for a selected time period by comparing the estimated costs of renting versus buying over the same period. (For related reading, see To Rent or Buy? The Financial Issues.)
Equity and Tax Considerations
Proponents of home buying often cite the ability to build equity as a reason to purchase a home. In many cases, this is true. Equity takes time to build, however, and if you sell the home during the first few years of the mortgage, you may have built little or no equity in the home. If you plan on staying beyond those first several years, however, you’ll start to build equity.
Mortgage interest and property taxes are both deductible on the federal income-tax return, but only if the amount of itemized deductions is greater than the standard deduction. As such, this tax break should only be considered a benefit if you can take advantage of it. (For more, see Calculating the Mortgage Interest Tax Deduction.)
New Homebuying Options
Because many would-be homebuyers can’t afford a down payment or qualify for a mortgage, several companies have created alternative routes to homeownership. One such company is San Francisco-based startup Verbhouse, which is launching a propriety lease with an option to purchase program that lets program participants (“Verbees”) move into a home of their choice now with the option to buy later – combining the flexibility of renting with the long-term benefits of owning. Verbees lock in rent and a purchase price for up to five years, make monthly payments and build equity towards ownership – which can eliminate the need for a large down payment when it comes time to finance.
The program is ideal for would-be homeowners who don’t have a down payment saved or who have small credit problems that can be fixed within the next few years. "Verbhouse believes the emotional, social and financial benefits of homeownership should be attainable for everybody," Verbhouse CEO Marjorie Scholtz told Investopedia. "Homeownership is out of reach for many city dwellers, so Verbhouse developed a very needed solution."
There are other routes that let people eventually buy the home they're renting. For more on this option, see Rent-to-Own Homes: How the Process Works.Renters' Guide: Conclusion