To Rent or Buy? That is the Question for Millennials

    

To Rent or Buy? That is the Question for Millennials First State Community Bank Blog

Every family wants to own a home, but with flat wages and rising real estate prices, more people are starting to believe renting a home is the wiser choice. But is a home purchase really beyond your reach? If you take a hard look at your finances, you may find that mortgage payments would be about the same amount as paying monthly rent, and you get more for your money.

There are a number of advantages to homeownership. In addition to owning your own home, you have made a long-term investment. Home prices tend to go up; the Federal Housing Finance Agency reports that home prices rose an average of 34.71 percent between 2012-2017. On average, home values appreciate 6.9 percent each year. As your home value grows, so does your home equity, which you can turn into cash if you need it. Plus, you get tax breaks as a homeowner because you can deduct mortgage and home loan interest.

The challenge for most would-be homeowners is gathering enough cash for a down payment. However, with today’s attractive mortgage options for first-time home buyers, that may be less of an obstacle than you think.

Why Aren’t Millennials Buying Homes?

Younger prospective home buyers are deciding to continue renting for a number of reasons. One is that many couples under the age of 35 are delaying getting married and starting a family, choosing to instead concentrate on their careers. Renting offers the freedom and mobility to follow new career opportunities as they arise, rather than being tied to one spot because you own a home. Millennials also are carrying more student loan debt on average than previous generations, which makes it more challenging to save for a down payment. Additionally, most millennials are choosing to live in urban areas, which tend to have a high cost of living and high home prices, making renting the more practical option.

Millennials cite financial concerns as the primary reason they rent rather than own. A report from the Urban Institute shows that 53 percent of those polled say they can’t afford the down payment, 33 percent say they don’t qualify for a mortgage, 28 percent say renting is more convenient, and 26 percent say renting is cheaper.

But is renting cheaper? When you consider the rising cost of rent versus a fixed mortgage payment, mortgage payments will typically be lower. If you compare what you would pay in rent versus mortgage payments over two years, you may find that you can save if you can own your home.

Yes, You Can Buy a Home

If you take a realistic look at down payments and home loans, you’ll see that you, too, can buy your own home. To determine how much you can afford to spend on a home, start with the basics.

Compare the cost of rent versus homeownership. You know what your monthly rent is, and you probably have an idea of how often it increases. Take those numbers and compare them to property costs in the area. You can use an online mortgage calculator to makes some assumptions about home prices, down payment, and mortgage rates. When you weigh the added tax benefits and other perks of homeownership, does a mortgage look more attractive?

Next, take a hard look at your personal finances. Although most home purchases require 20 percent as a down payment, qualified first-time homebuyers only need as little as 3.5 percent. If the numbers lean toward buying a home, you can make a down payment your savings goal.

Before you get serious and start shopping for a mortgage, it’s a good idea to clean up your credit. Check your credit score first to see where you stand; ideally, you want to have a credit score of 580 or higher. To raise your credit score, pay off as much debt as you can. Make sure your credit cards are up to date with a zero balance. You also will have to show steady employment and income to qualify for a mortgage.

Thinking of buying your first home? Download The Essential Guide for First-Time  Home Buyers. >>

Assessing Your Home Buying Options

If you decide you want to buy rather than rent and have some money saved, start by talking to a mortgage lender. They can help you determine what you will need for a down payment and if you will qualify for a home loan. This will tell you how much you can borrow, which will determine how much you can afford for a home.

You also need to consider the type of mortgage that best suits your needs.

The most common home loan is a 30-year fixed mortgage, which has a fixed interest rate and payments that do not vary. If you want to pay more each month but shorten the payment terms, you also can get a 15-year fixed mortgage.

An adjustable rate mortgage (ARM) uses the prime rate as a metric to set the mortgage interest rate. The rate changes with the market, although you can lock the initial rate for a period of time.

An interest-only loan is structured so that you pay the interest on the mortgage before you pay the principal. This gives you lower initial monthly payments and could be a good way to get started in the housing market.

You might also qualify for a Federal Housing Administration (FHA) loan. These loans are backed by the government to help first-time home buyers who have a low income.

Once you prequalify for a mortgage, calculate the mortgage payment into your household budget to see how it compares to your current rent. Be sure to calculate in additional funds for homeowners insurance and property taxes, and consider extra costs such as home maintenance.

Now you can start house hunting. Be sure to think long-term; you will be in your home for some time, so determine how many bedrooms and bathrooms you need and consider factors such as the local school district and your potential commuting distance. Once you choose a neighborhood, research the median home price. Don’t plan on buying the least expensive house in the area—there will be a reason it’s so cheap.

Buying your own home is always a good investment. Remember, the younger you are when you buy a home, the more equity and wealth you will accumulate over the years. Your local banker can help you navigate the mortgage process and develop a plan to save for your first home purchase. Ready to learn more? Download The Essential Guide for First-Time Home Buyers for more financial tips on buying a home.

Download Guide: The Essential Guide for First-Time Home Owners

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