Buying

To Buy or Rent a Home? Weighing Which Is Better

To Buy or Rent a Home? Weighing Which Is Better

 

Photo

Rob and Natalia Austin with their 10-month-old son, Brady, at the townhouse they are renting in Pasadena, Calif. CreditMonica Almeida/The New York Times

Rob Austin and his wife, Natalia, have a 10-month-old son, healthy incomes and plenty of cash in the bank for a down payment on a house. But they are happily renting a townhouse in Pasadena, Calif., with no plans to buy for now, given the frothy prices in their area.

“As long as there is such a disconnect, where a couple like my wife and me have to put down a gargantuan down payment and still have a large monthly payment to get into a decent, and not necessarily nice, house, that is a game we don’t wish to play,” said Mr. Austin, a 39-year-old business manager at a biotechnology company. “When home price-to-income levels come back to a more normal level, when that happens, then we will be the first to jump in. If that never happens, that is O.K.”

More American households are renting, across all income levels and generations, for different reasons. But when homeownership is the centerpiece of the American dream, most of us have internalized certain ideals: Buying a home builds equity, putting you on the fast track to building wealth. Renting, by contrast, is essentially throwing money to the wind.

But with renters now accounting for 37 percent of all households, the highest level since the mid-1960s, according to the Joint Center for Housing Studies of Harvard University, more people may be renting for longer. Does that mean people who rent for extended periods, perhaps decades — even a lifetime — are forever at a disadvantage?

“Arguing about whether rent versus buy is a better financial decision is like debating active versus passive investment strategies, hedge funds versus mutual funds, Apple versus Google,” said Milo M. Benningfield, a financial planner in San Francisco. “Somebody’s going to be right in terms of higher returns in the future, but we can’t know in advance who that will be — and it will be tough to quantify how much risk was taken along the way.”

 

The arguments in favor of ownership are persuasive, particularly for people who expect to stay in place for at least five to seven years but probably more. A mortgage acts like a forced savings plan, even if you’re paying the bank hundreds of thousands of dollars in interest for the privilege of building equity. Call it the cost of enforcing a positive behavior.

Buying also generally protects consumers from rising rents, while traditional mortgage payments remain constant. Then, there is the fact that buyers are using borrowed money to purchase an asset that is likely to appreciate over a long period, though that can backfire as well (see housing market plunge, millions of underwater borrowers, circa 2008). Being able to call a place your own has a real, albeit intangible, value too.

How well any household will fare financially by buying or renting really depends on factors no one can predict. Other studies have found that renters who invest their down payment and any savings from renting as opposed to owning often come out ahead.

Either way, most financial professionals would caution against viewing a home purchase as an investment, particularly after factoring in the cost of maintenance, taxes, insurance and the high costs of buying and selling, though it’s difficult not to.

It may be hard for people living in bubbly markets to believe, but, over all, home prices in the United States have risen just 0.37 percent annualized, after inflation, for the last 126 years, according to calculations by Robert J. Shiller, an economist who received the Nobel in economic science in 2013 and wrote the book on speculative bubbles, “Irrational Exuberance.”

“Disregarding the special amenities that many people value in homeownership,” Professor Shiller said, “it would be hugely better invested in the stock market.”

And many people do accumulate substantial equity in their homes, which often becomes a cushy safety net in retirement. A study by the Harvard Joint Center found that, even after the housing crash, the median household who bought a home after 1999 still accrued significant amounts of wealth through 2013 (though whites gained more than African-Americans and Hispanics).

Is It Better to Rent or Buy?

The choice between buying a home and renting one is among the biggest financial decisions that many adults make.

Christopher E. Herbert, managing director of Harvard’s Joint Center, said he believed the results could be tied, in large part, to behavioral incentives. “The motivated savings up front and the forced savings over time,” he said of accumulating a down payment and making mortgage payments.

There may also be something about many people who buy. As Mr. Benningfield pointed out, they may have other attributes that may contribute to their economic success.

Renting can still be financially advantageous under certain circumstances. Consider the work in 2012 by the academics Eli Berachaof Florida International University and Ken Johnson of Florida Atlantic University. They simulated a horse race between buyers and renters, and concluded that in many cases, renters came out ahead, at least during the eight-year stretches they studied.

Theoretical renters put their down payment in a portfolio that often consisted of more than 50 percent stocks (the professors created a portfolio that approximated the risk of owning a home), and continued to invest any savings from renting. But this assumes that there aresavings from renting, which is not always the case, and that the renter is disciplined enough to actually set the money aside.

The authors’ point, however, is that people often blindly believe that buying is usually the smarter option. “Most of the public drive to buy is without looking under the hood,” Professor Johnson said.

Another study, from HelloWallet, a unit of Morningstar, came to similar conclusions in 2014 when comparing a hypothetical, moderate-income family that bought, with one that rented, in 20 major cities across the country. The study projects that median-income families, or those who earn about $50,000, will often end up with more net wealth if they rent versus own over the 10 years from 2013 to 2022.

But any number of variables can quickly shift that calculus, including the price of the home relative to the rent, whether the family is affluent enough to benefit from tax savings, and the time spent in the home.

“The longer you stay, the stronger the argument is for buying, all else equal,” said Aron Szapiro, who conducted the analysis. But he also contends that the tax advantages of homeownership are often oversold, particularly to moderate-income households.

If you’re trying to determine the right option, some guideposts may help. Mr. Szapiro, for example, found that in households with about $100,000 in earnings, net wealth typically rose more 10 years after buying a home than if they had rented — but only if the annual rent was 6 percent or more of the purchase price. So it would pay to buy a $600,000 home when rent in the area was about $3,000 a month or more. (In a couple of places, including New York and Washington, he found that it made sense to buy when the cost of renting was a bit lower relative to home prices.)

William Bernstein, an investment adviser who has written several books for do-it-yourself investors, offered another rule of thumb: Never pay more than 15 years’ fair rental value for any home, or 180 months of rent.

Why 15 years? By his calculations, someone paying more than 180 months of rent might potentially do better by investing in the market, after considering the costs of owning.

So if an apartment would rent for $4,000 a month, that means you shouldn’t pay more than $720,000 ($4,000 x 180) for an equivalent property.

Perhaps easier to digest, Zillow advocates looking at how long it would take for buyers to break even, when compared with renters who invested their down payment of 20 percent and any savings in the stock market. Not surprisingly, buyers in places like Brooklyn, Washington and Los Angeles had to wait longer, at least four years.

Then there’s what you feel in the pit of your stomach. To Mr. Austin, house prices in the enclave where he lives in Los Angeles feel as if they are in a bubble, the housing downturn a faded memory. “Many people we know,” he added, “are tripping over themselves to buy right now.”

AFFORDABILITY 101

Affordability 101

If you earn $56,516, the average household income, you can afford $1,695 in total monthly payments, according to the 36% rule. The rule, which measures your debt relative to your income, is used by lenders to evaluate how much you can afford.

Key factors in calculating affordability are 1) your monthly income; 2) available funds to cover your down payment and closing costs; 3) your monthly expenses; 4) your credit profile.

  • Income – Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.
  • Funds available – This is the amount of cash you have available to put down and to cover closing costs. You can use your savings, investments or other sources.
  • Debt and expenses – It’s important to take into consideration other monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.
  • Credit profile – Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower. Those factors will help determine how much money you can borrow and what interest rate you’ll be charged. Check your credit score.

We’ll provide you with an appropriate price range based on your situation. Most importantly, we’ll take into account all your monthly obligations to determine if a home is comfortably within reach.

PRO TIP:
It’s also important to plan for the future. Consider creating a savings plan for upcoming life events, such as having a child.

For more information about home affordability, read about the total costs to consider when buying a home.

When banks evaluate your affordability, they only take into account your outstanding debts. They do not take into consideration if you want to set aside $250 every month for your retirement or if you’re expecting a baby and want to set aside additional funds. NerdWallet’s Affordability Calculator helps you easily understand how taking on a mortgage debt will affect your expenses and savings.

Appraisals

Hi LEAD_NAME –

Appraisals play a major role in all real estate transactions. A home appraisal is an evaluation done by a certified appraiser where they calculate the market value of your home based on square footage, features and location.

There are two common sales approaches that are used in the residential market. The most common is the sales Comparison Approach, which is a method where the appraiser estimates property market value by comparing it to similar properties. The second is the cost approach, most commonly used with new properties. In this method, the build costs are taken into consideration and the appraisers estimates what it would cost to replace the property if it were to be destroyed.

What You’ll See on a Residential Appraisal Report:

  • Details about the property as well as side-by-side comparisons with three similar properties.
  • Information on the type of property
  • An evaluation of the overall local real estate market
  • Details on any issues the appraiser feels are harmful to the value of the property, such as poor street access
  • Notes about any serious flaws, such as a cracked foundation
  • An average sales time estimate

If you’re interested in learning more about appraisals or if you have any other questions about the buying or selling process, please don’t hesitate to reach out to me.

Sincerely,

AGENT_NAME

AGENT_NAME, AGENT_DESIGNATIONAGENT_EMAIL

AGENT_PHONE

AGENT_WEBSITE_LINK

AGENT_BRE

Do you know what you want for a home?

Hi LEAD_NAME –

One of the first logical steps in the home search process is narrowing down your true wants and needs in a home. Doing this simple exercise early in the process will help save you time and frustration during the search process.

Some major things to consider:

  • How many bedrooms/baths?
  • What neighborhood or area?
  • How close do you need/want to be to schools?
  • What is your price range?
  • How close to work?
  • How much square footage do you need?

You should also consider which features of the home might be required vs. nice to have. Things like:

  • Garage
  • Yard
  • Swimming Pool or hot tub
  • Walk-in closets
  • Fireplace

I_AM_WE_ARE sure you will find that spending a little time in advance thinking about these things is well worth it. I_WE would love to sit down with you and guide you through the exercise.

How else may I_WE_LC be of service in your home search? I_WE look forward to serving you in any way I_WE_LC  can. Please don’t hesitate to contact ME_US_LC.

Sincerely,

AGENT_NAME

AGENT_NAME, AGENT_DESIGNATIONAGENT_EMAIL

AGENT_PHONE

AGENT_WEBSITE_LINK

AGENT_BRE

Finding the right agent for your home search is very important.

Hi ! –

Finding the right agent for your home search is very important. A great agent will not only show you properties, but will also make the whole process more successful and painless.
Here are some of the many services you can expect from me, Jaclyn Nelson as your agent:

  • Accessing every home on the market (and some that aren’t yet!)
  • Viewing properties that are inaccessible without an agent
  • Referring you to qualified professionals (insurance, mortgage, legal, etc.)
  • Successfully negotiating the best price and terms
  • Representing you through the contract, escrow and closing process

Questions to ask Loan Officer

Hi LEAD_NAME –

The mortgage loan process can be very confusing and stressful, so I_WE_LC thought I_WE_LC might take this opportunity to share some good questions to discuss with your lender when applying for a home loan:

 

  1. What kind of fixed-rate and adjustable mortgage loans available?
  2. How long can I “lock-in” the financing at the current interest rate and what is the lock-in policy?
  3. Is a float down lock available in case rates drop after I have locked-in?
  4. What are the other fees a lender may charge me in conjunction with my loan?
  5. Are funds for a second mortgage available?
  6. Is there a pre-payment penalty clause? This involves extra charges for paying off the loan before maturity. About 80% of all mortgage loans are paid off early.
  7. What is the “grace” period?
  8. How late can a monthly payment be made before a late charge is assessed?
  9. What will happen if a payment is missed?
  10. If you sell your house, will the new buyer (if he/she qualifies) be able to assume your mortgage at the same interest rate?
  11. Do you have to pay “points” to get your new mortgage? Usually lenders charge points for the cost of giving you a mortgage loan. A “point” is 1% of the loan.
  12. Will the lender require mortgage insurance?
  13. Is the loan serviced locally or is the servicing sold?
  14. What will the total closing costs be?

 

Questions on adjustable rate mortgages:

  1. How often will the interest rate be adjusted?
  2. Is there a maximum limit on each rate change?
  3. How often will the monthly payment be adjusted?
  4. Is there a ceiling on payment adjustments?
  5. Can the term of the loan be extended?
  6. What is the maximum rate that can be charged over the life of the loan?
  7. Is there any potential for negative amortization?
  8. What is the annual percentage rate?

Sincerely,

Jaclyn Nelson

516-757-8585

What to Know About Your Credit Before Buying a Home

It’s not just whether you pay your bills on time that matters

 

this article was contributed by financial expert and blogger Mary Beth Storjohann, CFP, author, speaker, and founder of Workable Wealth. She provides financial coaching for individuals and couples in their 20s to 40s across the country, helping them make smart, educated choices with their money.

Like it or not, your credit score is one of the most important numbers in your life, ranking up there with your Social Security number, date of birth, and wedding anniversary. This three-digit number is your financial report card, except there’s no getting rid of it after college.

Your credit score shows lenders just how trustworthy you are when it comes to managing your finances, and it can either save or cost you thousands of dollars throughout your life.

If you’re in the dark about just how significantly this number can impact you and the details behind your personal score, here’s an overview of what you need to know before hitting the mortgage application process.

How Your Score is Calculated

Your FICO credit score is comprised of five elements, according to the Fair, Isaac Corp.

  1. 35% of your score is attributed to how you pay your bills. Points are added for paying on time and deducted for late or missing payments. Note: This is a big portion of your score, so if you’re not paying bills on time, it’s best to get that under control pronto.
  2. 30% of your score is based on your credit utilization ratio. Translation: How much money do you owe as a portion of the amount of credit available to you? The lower this ratio, the better.
  3. 15% is based on the length of your credit history. When did you open your first account (and is it still open)?
  4. 10% of your score goes to the type of credit you have. Think revolving credit (such as credit cards) and installment credit (such as car loans and mortgages).
  5. The last 10% is impacted by new credit applications. How often and for what types of credit are you applying?

Where to Find Your Score and Report

To access your credit report, use a website such as annualcreditreport.com, which will give you one free report a year, or creditkarma.com, which will provide you with free access to your score upon signing up for an account.

Once you have copies of your report and score, immediately look for fraudulent or erroneous information. If you find anything, immediately contact both the credit reporting agency and the company that is portraying inaccurate information to determine next steps.

How Your Score Can Cost You

Your score can range from about 300 to 850. You’ll find a variety of breakdowns on what’s considered “good” compared to “excellent” versus “poor,” but in general you’ll want to aim for a score of 720 and higher, which is the “excellent” range.

The higher your credit score, the more creditworthy you appear to lenders (meaning they can rely on you to pay your debts and pay them on time), which translates into lower interest rates and more money saved when taking out a loan.

Not sure how this can play out financially? Consider this:

Meet Claire: She’s 35, pays her credit card off in full each month, has all her bills on auto-draft, and never misses a payment. She’s had a positive credit history for 10 years and wants to buy a home. Claire was approved for a $200,000, 30-year fixed-rate loan at 3.75%.

Meet Steve: He’s 32, obtained his first credit card at age 18, ran up some debt in college that he’s still working on paying down, and has no system for keeping track of bills. He has consistent late and bounced check fees. Steve wants to buy a home and was approved for a $200,000, 30-year fixed-rate loan at 5.5%.

What’s all the fuss about if they were both approved? Over the life of her loan, Claire will pay $133,443.23 in interest. Over the life of his loan, Steve will pay $208,808.08 in interest. A small interest rate difference of 1.75% translates into $75,364.85 more paid by Steve! $75,000 is a pretty significant sum of money that could be used toward other goals.

Having a solid credit score is one of the most financially savvy tools for you to have on hand when it comes to buying a home. When managed wisely, your credit score will bring you confidence, peace of mind, and more money saved via low interest rates.

When mismanaged or not cared for at all, your credit score can delay your success in meeting financial goals and result in additional funds and resources spent correcting past mistakes.

Related: 7 Credit Score Myths Even Shrewd Home Buyers Fall For

Mary Beth Storjohann of Workable Wealth

MORE INTop Home Finance Tips from a Top Money Coach

See the full spotlight

 

Should You Look for Your First House Or Keep Renting?

Your First House Or Keep Renting?

Packed moving boxes in a homeImage: Kettyah Chhak

5 key questions to ask yourself before buying a home.

KEY TAKEAWAYS

Tired of working so hard just to build your landlord’s equity instead of your own? Been dreaming about paint swatches and obsessing over Pinterest projects? Making that leap from renting to owning a home comes with many perks — both financial and emotional. And even though home ownership comes with great responsibility, you might be surprised how achievable it can be.

Certainly, the best time to trade security deposits for a down payment is different for everyone. If you’re thinking about switching from renting to owning, ask yourself these five questions to decide if you’re ready to embark on the home ownership adventure.

1. Are You Financially Prepared?

Let’s not beat around the bush: Buying a home requires a substantial financial commitment.

There’s the down payment, of course. “On average, you want to have a minimum of 5% to 7% of the cost of the home you’re targeting,” says Jason Harriman, a REALTOR® with San Antonio-based Heyl Real Estate Group at Keller Williams Realty. Then, add 3% to 6% more for closing costs, which will vary based on where you live and what taxes your state and city require you to pay.

Tip: Keep in mind if you put down less than 20%, you’ll pay PMI, private mortgage insurance, which protects the lender in case of default. Usually, it’s about $50 to $200 a month. But once you reach a certain threshold on your loan to value ratio, you can cancel PMI.

A healthy credit history is also important. Most borrowers will start to qualify for a mortgage with a minimum score of 620 — but the most competitive interest rates will be offered to those with a score of 700 or above. So if you haven’t started practicing those good credit habits yet, it’s time to start developing them.

Related: Myths About Credit Scores

One of the trickiest hurdles for young adults, so many of whom are lugging around student loan debt, is the debt-to-income (DTI) ratio. Mortgage companies want borrowers to have a certain level of cash flow each month, and that means taking into account how much you’re paying out to other lenders. Ideally, a borrower’s debt-to-income ratio — how much you pay toward debt each month divided by your gross monthly income — should fall below 36%. (Strictly speaking, a loan is considered able to be paid if the DTI doesn’t exceed 43%.) If yours doesn’t, think about how you can get that debt needle moving in the right direction.

“The best way to do this is to pay off any unsecured debts like credit cards and personal loans, and keep them as close to a zero balance as you can,” says Harriman.

What Nest is Next?

To rent or buy? What to consider. More like this.

 

2. Are You Prepared to Make Compromises?

Kathleen Celmins, who manages the personal finance site “Stacking Benjamins,” was financially prepared to manage a mortgage. But once the house hunting began, she quickly realized she was priced out of the homes she had envisioned for herself.

“I originally wanted a single-family home with a yard and in a great neighborhood,” she says. But given her price point, the homes she could afford ended up being in, well, not the greatest neighborhoods. “At one point, we looked at a property that was directly behind a strip club,” she laughs. “We didn’t even go inside.”

After several weeks of searching, Celmins realized she needed to find a middle ground. “In my price range, I could get a not-so-great house in a not-so-great neighborhood. Or, I could get a really cute condominium with a gas range and granite countertops,” she says. “It was something I compromised on. I gave up a yard for having fancy stuff in my condo.”

3. Are You Emotionally Ready?

When it comes to renting, surprises don’t require much emotional investment. The rent goes up? You can move. The fridge is on the fritz? The landlord will send someone over. Home ownership is a bit more hands-on. If the toilet breaks, it’s time to start reading Yelp reviews. And if property taxes unexpectedly rise, it’s on you to appeal or pay up.

“My homeowners association fee doubled in the first year I owned my condominium,” says Celmins. “Then my real estate taxes were reassessed. My mortgage payment went up and I panicked. I didn’t even know that could happen.”

Of course, having the financial flexibility to cover those unexpected things is important, but don’t overlook the importance of having the mental and emotional capability of dealing with them responsibly when they arise. Everything could be peachy for months, and then three maintenance issues might spring up in the same week. Stress management and problem solving skills are home ownership biggies.

4. Will Owning Pay Off in the Long Run?

Depending on the home you choose and where you live, you may pay a lower mortgage than you paid for rent. But even if you don’t, there’s still the financial advantage of building equity in your home, instead of lining your landlord’s pockets.

5. Has Your Lifestyle Outgrown Renting?

Many people find a rental can only take them so far. When you’re ready to start a family, you’re going to want a few extra rooms, and that can get expensive with rising rental rates. A yard also provides a safe place for Junior to play or for a dog to scamper around. And speaking of Fido, the vast majority of renters have trouble finding a place that will allow for their pet. Home ownership can end that stress for good.

Then there are the renovations. If you’re itching to test out your DIY skills and personalize your space, you’re probably ready to own. Landlords who allow property renovations — especially DIY projects — are few and far between.

Buying a first home is a big change — both from a financial and an emotional perspective. Still, for many, home ownership can be one of the most rewarding life choices one can make. “Turns out it’s awesome,” said Celmins. “I love it so much.”

Related:

 

Before Buying, REALTORS Insist You do These 4 Things

Before Buying, Real Estate Pros Insist on Doing These 4 Things

What you really need to know about buying — from the people who house hunt for a living.

 

One house you’re looking at has the wraparound porch you’ve fantasized about, but it’s on a high-traffic street. The condo you like has a doorman in the lobby (you can order online now!), but it has no dedicated parking. What to choose?

It’s not every day that you buy a home and make decisions about the next three, five, or 10 years of your life. Since you can’t exactly take a home on a test drive, how do you decide? That got us to thinking about real estate pros. When they’ve seen practically everything on the market, how do they choose?

Four pros who’ve seen it all share their advice and their stories of hunting for just the right home.

Compromise for Your Priorities

Veteran real estate agent Nancy Farkas knew exactly what she wanted in her home: ranch style, three bedrooms, high ceilings. But you know what she bought? A two-story Colonial.

Huh?

For Farkas, an associate partner with Coldwell Banker Heritage REALTORS®, in Dayton, Ohio, the home’s location and price trumped style. “I had a dog I had to go home and walk at noon, and the house was close [to work] and the right price,” she says.

Her advice: Make sure your practical and functional priorities don’t get lost in all the home buying hoo-ha (sparkling granite counters, new hardwood floors, a steam shower!). Remember, you can always add the hoo-ha, but you can’t make a home fit all priorities, such as location and price.

Dig Into the Details (Dull, Yes, But Worth It!)

When Grigory Pekarsky, co-owner and managing broker with Vesta Preferred Real Estate in Chicago, was looking for his first home, one of his priorities was to minimize his maintenance costs. He made sure to find out if the house had a newer roof, good siding, and a newer furnace. But he recommends you go even deeper to uncover a home’s not-so-obvious maintenance costs:

  • Scope out the sewer line — especially if you’re interested in an older home — to make sure there aren’t any tree branches or other debris clogging up the works. Otherwise, you might find some nasty sludge in the basement.
  • Look at the trees. How mature are they? Roots from older trees can invade the sewer line; untrimmed branches can pummel your gutters during storms.
  • Know what’s not covered by homeowners insurance. “I learned seepage isn’t covered. Shame on me,” he says.
  • Ask how old the appliances are. You might need to budget for something new in a few years. Sellers are only required to fix what the inspector finds is broken; they’re not going to upgrade working appliances for you.
Grigory Pekarsky opening his refrigeratorImage: Jacob Hand for HouseLogic

Seek a House That Matches Your Lifestyle

Having lived the high-rise apartment life as a renter, Pekarsky knew a single-family home was just what he wanted. He was tired of living in a relatively small space with no yard. He wanted a house he could “grow into in the next three to five years.” That meant multiple bedrooms and bathrooms for the family he plans on having. So what he bought — a three-story, single-family with a finished attic bedroom (shown below) on Chicago’s North Side — suits his lifestyle perfectly.

Grigory Pekarsky in his bedroom with his dogImage: Jacob Hand for HouseLogic

In addition, “you get the biggest value from owning the land,” he says. “In a single-family [home], people aren’t telling you what to do with the investment.”

On the other hand, Matt Difanis wished he’d bought a condo when he bought his first home, a small bungalow ranch in a charming, historic neighborhood in Champaign, Ill. It was first-home love — until it rained.

“If I didn’t clean out the gutters before every rainstorm, the basement would leak,” says the broker-owner of RE/MAX Realty Associates in Champaign. He didn’t realize that taking care of a single-family home wouldn’t be his cup of tea. “I should have opted for a condo without gutters to clean and a lawn to mow,” he says.

Agent Amy Smythe Harris of Urban Provision REALTORS®, in Woodland, Texas, bought a home with a sizable downstairs suite her parents could use now (and she could use years from now). She says her millennial clients aren’t forward-thinking about their lifestyles. Some are childless and say they don’t care about schools, pools, and tennis courts. Then they become parents a few years later and have to move.

“Once they have kids, the first question [they] ask is about school districts, and the second is about where the parks and pools are,” she says.

The pros’ bottom-line advice: Think of your lifestyle preferences and how those might change in the next few years. After all, the typical homeowner lives in a house for a median of 10 years before selling, NATIONAL ASSOCIATION OF REALTORS® data shows.

Look at the House Through the Lens of Resale

All the real estate pros we talked to — no surprise here — emphasized resale. Take appraiser Michelle C. Bradley of Czekalski Real Estate Inc. in Natrona Heights, Pa. When she built her current home — a 2,200-square-foot ranch — she included a full, unfinished basement, even though she has no use for one and rarely ventures into it.

Why would she do that? Because basements are standard in her southwest Pennsylvania market. But Bradley’s not going to finish the basement until she’s ready to sell. That way, she avoids having to clean it and ensures she’ll install the most fashionable bathroom fixtures at sell time.

Her advice: “Don’t buy or build something unique that you can’t resell. If you’re not in an area with log homes, don’t choose a log home. If you’re not in an area with dome homes, don’t choose a dome home.”

Likewise, If you buy a home priced higher than average for the area, it’ll be difficult to resell at a higher price.Read More InBuy Your First Home in One Year: A Step-by-Step Guidedon’t buy a home that’s not in line with the neighborhood’s average price . When you go to resell, you’ll find yourself in an uphill battle to maintain your higher price.

Other advice from the pros: Watch out for unfixable flaws that could affect resale, like:

  • What’s next to the home, such as vacant land that could be developed, high-traffic businesses, noisy power generation stations, a cell tower, etc.
  • Lot issues, such as a steep driveway that could double as a ski slope in winter, or a sloped yard that sends water special delivery to your foundation.

Of course, a home isn’t just about resale. It’s just one factor to consider. Remember the first point: Be willing to compromise for your priorities. If the home meets your priorities and you’re going to stay there awhile, then resale might be where you compromise.

Related: Are You Making a House-Hunting Etiquette Mistake?

Christina Hoffmann also contributed to this story.

EDIT: Should You Look for Your First House Or Keep Renting?

Should You Look for Your First House Or Keep Renting?

Packed moving boxes in a homeImage: Kettyah Chhak

5 key questions to ask yourself before buying a home.

KEY TAKEAWAYS

Tired of working so hard just to build your landlord’s equity instead of your own? Been dreaming about paint swatches and obsessing over Pinterest projects? Making that leap from renting to owning a home comes with many perks — both financial and emotional. And even though home ownership comes with great responsibility, you might be surprised how achievable it can be.

Certainly, the best time to trade security deposits for a down payment is different for everyone. If you’re thinking about switching from renting to owning, ask yourself these five questions to decide if you’re ready to embark on the home ownership adventure.

1. Are You Financially Prepared?

Let’s not beat around the bush: Buying a home requires a substantial financial commitment.

There’s the down payment, of course. “On average, you want to have a minimum of 5% to 7% of the cost of the home you’re targeting,” says Jason Harriman, a REALTOR® with San Antonio-based Heyl Real Estate Group at Keller Williams Realty. Then, add 3% to 6% more for closing costs, which will vary based on where you live and what taxes your state and city require you to pay.

Tip: Keep in mind if you put down less than 20%, you’ll pay PMI, private mortgage insurance, which protects the lender in case of default. Usually, it’s about $50 to $200 a month. But once you reach a certain threshold on your loan to value ratio, you can cancel PMI.

A healthy credit history is also important. Most borrowers will start to qualify for a mortgage with a minimum score of 620 — but the most competitive interest rates will be offered to those with a score of 700 or above. So if you haven’t started practicing those good credit habits yet, it’s time to start developing them.

One of the trickiest hurdles for young adults, so many of whom are lugging around student loan debt, is the debt-to-income (DTI) ratio. Mortgage companies want borrowers to have a certain level of cash flow each month, and that means taking into account how much you’re paying out to other lenders. Ideally, a borrower’s debt-to-income ratio — how much you pay toward debt each month divided by your gross monthly income — should fall below 36%. (Strictly speaking, a loan is considered able to be paid if the DTI doesn’t exceed 43%.) If yours doesn’t, think about how you can get that debt needle moving in the right direction.

“The best way to do this is to pay off any unsecured debts like credit cards and personal loans, and keep them as close to a zero balance as you can,” says Harriman.

To rent or buy? What to consider.

 

2. Are You Prepared to Make Compromises?

Kathleen Celmins, who manages the personal finance site “Stacking Benjamins,” was financially prepared to manage a mortgage. But once the house hunting began, she quickly realized she was priced out of the homes she had envisioned for herself.

“I originally wanted a single-family home with a yard and in a great neighborhood,” she says. But given her price point, the homes she could afford ended up being in, well, not the greatest neighborhoods. “At one point, we looked at a property that was directly behind a strip club,” she laughs. “We didn’t even go inside.”

After several weeks of searching, Celmins realized she needed to find a middle ground. “In my price range, I could get a not-so-great house in a not-so-great neighborhood. Or, I could get a really cute condominium with a gas range and granite countertops,” she says. “It was something I compromised on. I gave up a yard for having fancy stuff in my condo.”

3. Are You Emotionally Ready?

When it comes to renting, surprises don’t require much emotional investment. The rent goes up? You can move. The fridge is on the fritz? The landlord will send someone over. Home ownership is a bit more hands-on. If the toilet breaks, it’s time to start reading Yelp reviews. And if property taxes unexpectedly rise, it’s on you to appeal or pay up.

“My homeowners association fee doubled in the first year I owned my condominium,” says Celmins. “Then my real estate taxes were reassessed. My mortgage payment went up and I panicked. I didn’t even know that could happen.”

Of course, having the financial flexibility to cover those unexpected things is important, but don’t overlook the importance of having the mental and emotional capability of dealing with them responsibly when they arise. Everything could be peachy for months, and then three maintenance issues might spring up in the same week. Stress management and problem solving skills are home ownership biggies.

4. Will Owning Pay Off in the Long Run?

Depending on the home you choose and where you live, you may pay a lower mortgage than you paid for rent. But even if you don’t, there’s still the financial advantage of building equity in your home, instead of lining your landlord’s pockets.

5. Has Your Lifestyle Outgrown Renting?

Many people find a rental can only take them so far. When you’re ready to start a family, you’re going to want a few extra rooms, and that can get expensive with rising rental rates. A yard also provides a safe place for Junior to play or for a dog to scamper around. And speaking of Fido, the vast majority of renters have trouble finding a place that will allow for their pet. Home ownership can end that stress for good.

Then there are the renovations. If you’re itching to test out your DIY skills and personalize your space, you’re probably ready to own. Landlords who allow property renovations — especially DIY projects — are few and far between.

Buying a first home is a big change — both from a financial and an emotional perspective. Still, for many, home ownership can be one of the most rewarding life choices one can make. “Turns out it’s awesome,” said Celmins. “I love it so much.”

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