Making Money-Wise Housing Decisions
There’s a lot that goes into housing decisions. For some, moving out of a parent’s home for the first time is a daunting task. Or, maybe you’re looking to buy your very first home. Understanding the ins and outs of home finance can help make you better prepared.
Before you jump into either, ask yourself some important questions:
- What monthly payment can you manage (regardless of renting or buying)? Will you be paying the costs by yourself or will you have a co-buyer or roommate?
- Is your employment stable?
- Do you know your credit score?
- Are you planning to stay in the area for a while, or is this a temporary situation?
- What kind of housing market are you entering?
- Do you have money saved for a down payment if you’re wanting to buy? If not, have you checked out options for first-time homebuyers, or other programs you may qualify for?
Today, it seems like either option can be a challenge as home prices are soaring, and rental costs along with them. Here are some things to consider:
Know Your Credit Score
Why is your credit score important in housing decisions, even renting?
Most landlords will run a credit check to give them an idea of how likely you are to make your rent payments on time. For homebuyers, mortgage lenders pull your credit history and will make decisions about your interest rate and other terms based on the report.
There are a number of ways to check your credit score and monitor your spending. Many online apps provide free services and you are eligible for a free credit report each year. The website: www.annualcreditreport.com is a great resource for access to all three credit bureaus and credit resources.
A good credit score has a major impact on your finances, so it’s important to start out strong. Use this Coach Session to learn how to build credit and create a plan with options that work for you.
Breaking Down the Costs
Housing costs will likely be a substantial part of your monthly budget. If you’re on the lookout for a new place, this calculator can help you determine what you can afford.
When you're budgeting for rent, make sure you know what a monthly payment covers. Landlords in different areas include specific things in the price of rent. For example, in some cities, landlords are required to provide heat, hot water, and utilities. Elsewhere, you're required to pay for some or all of these services on top of the rent—as well as arrange for them. If you’re renting a home, you are often responsible for the upkeep of landscaping and yardwork. Hidden costs like these can tack on as much as a few hundred dollars a month to what you pay for housing, so make sure you're aware of them as you start to plan.
Don’t Forget Insurance
A renter's insurance policy can help protect your personal property and yourself from liability for accidents that happen in your living space.
Fortunately, renter's insurance offers an easy and affordable way to protect yourself from all sorts of losses, both inside and outside your home. It covers your possessions against losses from fire and smoke, theft, vandalism, lightning, wind, explosions, and water damage from leaking plumbing.
Things you take with you away from home are also generally covered, though the amount of coverage may range from 10% of their value to full replacement cost, depending on your policy. You may also be covered for things you borrow that are lost, stolen, or damaged while you have them.
The Costs of Buying
The actual amount you'll spend to buy a home depends on the part of the country you want to live in and the type of home you want. While the dollar amount will vary, certain guidelines apply wherever you buy.
Unless you’re flush with cash, it's likely that you will need money for a down payment and will need to get a mortgage—a long-term loan you use to buy a home. Traditionally the down payment has been between 10% and 20% of the sale price, though there are some government sponsored programs that let you put a smaller amount down. The less you put down, the larger your mortgage payments will be.
What a mortgage costs depends on three factors: the principal, or amount you borrow, the finance charge (interest) you pay for using the money, and the term, or length of time the mortgage lasts. There are a number of other fees and costs involved in buying a home which can add 3 or more percent to the overall cost. Just like renting, you need to factor in all of the costs of home ownership to make sure all of the housing costs will fit into your budget. Being “house poor” can shatter your home ownership dream.
The Pros and Cons
Renting may be a smart financial move for these reasons:
- You probably won't pay property taxes and upkeep directly, though your rent may reflect these expenses.
- With no money tied up in real estate, you should have more cash or savings to invest, which can produce more growth than real estate.
- You run no risk that the value of your property will decline.
- Renting gives you more mobility to take advantage of a job opportunity in a different area.
Buying a home has its advantages as well:
- You may be able to deduct the interest on your mortgage and your local property taxes on your tax return, which can reduce your taxes and free up cash for investing.
- You build equity as you pay off your mortgage, increasing your share of the property's value.
- You may be able to get a home equity loan or line of credit where you borrow against the part of your home that you own. These options generally have lower interest rates than personal loans and you can often deduct the interest you pay on your taxes.
- If your house increases in value over time, you may make a profit when you decide to sell.
- While the effects are harder to measure, owning a home has enormous emotional advantages.
As your financial partner, Pyramid FCU is here to help you understand where you stand with your credit score and answer questions about home loans and other financial matters. Give us a call at 520-795-7950 to set up a time to talk.
Disclaimer: While we hope you find this content useful, it is only intended to serve as a starting point. Your next step is to speak with a qualified, licensed professional who can provide advice tailored to your individual circumstances. Nothing in this article, nor in any associated resources, should be construed as financial or legal advice. Furthermore, while we have made good faith efforts to ensure that the information presented was correct as of the date the content was prepared, we are unable to guarantee that it remains accurate today.