Financial Factoring Behind Home Ownership

Maybe you are tired of paying your landlord’s mortgage and dreaming of owning your own home. It’s the American Dream, right? Who doesn’t want that sense of pride that comes with home ownership.

Calculating which is financially better for you, renting or buying a home can get very complex quickly. Not everyone is a thorough mathematician. I wanted to simplify the though process and provide some simpler guidelines for potential home buyers.

One of the first things I would consider as a home buyer is the length of time I intend to stay in the home. Buying a home and moving in a year or two doesn’t yield the financial benefits of staying a home for a decade.

Another thing I point out to my real estate clients, don’t bite off more mortgage than you can chew. Studies have shown that most bankruptcies in America happen over a mere $300 monthly cash flow problem. If you’re approved for $300,000 that doesn’t mean you should buy that much home. Keeping up with the Jones can cost you more than they have.

Renting or leasing a home can improve your credit score with a healthy payment history. Did you know owning a home and making your monthly mortgage payments on time has a more profound, positive impact on credit? Homeowners pay less for auto insurance. Lenders and credit-issuing companies smile on homeowners for borrowers being tied financially to a property. That doesn’t include you had to have good credit, or had to overcome bad credit, to purchase a house.

In your rent-or-buy-a-home calculations, you can’t just compare the monthly mortgage payment with the amount of a lease payment. You must consider the costs of a home warranty, maintenance costs and other things. Property taxes and homeowner insurance are included in the mortgage payments. The Homer Project put out a nice article, The Financial Logic of Home Ownership, with some other great insights on rent-or-buy-a-home considerations.

My point is, you need a safety net budget. Set aside an amount equal to 10% of your mortgage payment for maintenance. Maintenance expenses could be gas for a lawnmower or paying for lawn care services. What you don’t use save it toward a new roof, appliances or other big expense.

If you’re buying a home, you need to have more funds set aside for a variety of reasons. I suggest at least six months’ worth of bill paying power. If you’re renting and get laid off, you might be able to work it out with your landlord. Even if you can’t and are behind on rent, the impact to your credit is much less than defaulting on a mortgage.

Paying for an HOA is also a consideration, they can be expensive. Some exclusive neighborhoods charge HOA fees. More to calculate, some Home Owner Association fees include some maintenance like lawn care, garbage collection, snow removal etc.

One of the biggest things a would-be home buyer needs to think on is the market. With respect to location, rents and house values go up and down. You need to do some real estate market research before you buy a home.

Neighborhoods have an endless cycle of rise and decline. When a neighborhood is on the rise, house values go up. Sometimes house values rise for well over a decade. When a neighborhood is in decline, property values fall. There a lot of reasons for the direction a neighborhood takes. Check with your city planning, zoning can play a huge role on house values. Once a neighborhood had lovely views, now there’s a freeway or business expansion planned.