Homeownership has many advantages - both
financial and personal. But buying a home is an important decision. Look at the
benefits and the differences between homeownership and renting to better
understand if owning a home is right for you.
What are the benefits of homeownership?
Tax savings.
You may earn significant tax savings because you can deduct mortgage interest
and property taxes from your federal income tax and many states' income tax if
you itemize your deductions.
A more stable monthly housing expense.
Your monthly housing loan or mortgage expense can remain the same for the life
of your mortgage, depending on the type of loan you choose.
Equity.
You may build equity in your home over the life of your loan, which allows you
to plan for future goals like your child's education or your retirement.
Homeownership is not right for everyone. It
may not be the right time in your life or you may not like the commitment
associated with owning a home. Here are some differences between renting and
homeownership:
Renters are typically free from maintenance obligations such as
repairs or lawn care.
Homeowners often have more freedom in decorating, landscaping,
etc.
Renters can move more easily and more quickly than homeowners and
there are higher costs associated with buying and selling a home.
Homeowners have a financial investment and may build equity in
their home.
Overall, homeownership is a good investment
for most people, but there are risks. If you understand the benefits and risks
of homeownership, you can make the best decision about when to buy a home.
So what are the risks of homeownership?
Monthly housing expenses can increase.
Your monthly mortgage payment may be larger than your rent. These higher
monthly payments may be offset by a tax benefit at the end of the year. Talk to
a tax professional to understand your particular situation.
You become your own landlord.
If an appliance breaks, you will have to pay for its repair or replacement. You
are also responsible for the maintenance and upkeep of your home and your
property.
You must sell your house to move.
Depending on the local real estate market, you might not be able to sell your
home quickly. You should also factor in the likely expense of hiring a real
estate professional. Fees can be negotiated and vary across regions. They also
vary from professional to professional.
Property values can depreciate.
You can lose value in your home for a number of reasons, such as a recession,
the condition of your home not being kept up, or a drop in a neighborhood's
home values. If your home loses value and you have to sell it for less than you
owe, you will be required to repay the full mortgage.
To get a quick idea of what you can afford to
spend, multiply your annual gross income (before taxes) by 2.5. For example, if
your annual household income is $50,000, you might be able to qualify for a
$125,000 home. This is just a rough estimate - the actual number will vary
based on factors such as your debt and credit history.
Mortgage lenders typically use the housing
expense and debt-to-income ratios to more accurately determine how much you can
afford to spend on your mortgage.
Housing Expense Ratio
Mortgage lenders recommend that your monthly mortgage payment should be less
than or equal to a quarter of your monthly gross income. This percentage can
change based on the type of mortgage you choose and sometimes the area in which
you're looking to buy.
Debt-to-Income Ratio
You need to factor your other debts into determining an affordable monthly
mortgage payment. Mortgage lenders look at whether your total debt is larger
than 30-40% of your monthly gross income. Remember, debt is not just credit
cards and student loans. It can also include alimony, child support, car loans,
and housing expenses.
A mortgage lender, a housing counselor, or
consumer credit counselor can help you better understand these guidelines.
Before you talk to a financial professional, you can organize your financial
picture by creating a budget [PDF 76K ].
Don't forget that you also have to save for the down payment, closing costs,
inspections costs, moving, and other related expenses.
Lenders evaluate mortgage applications a lot
differently today than they did even 10 years ago. And even more has changed in
the last 20 years. What used to close the door to homeownership may not be a
factor today.
Here are some common homeownership myths:
Myth: You need great credit to become
a homeowner.
Fact: You may still be able to buy a home with
less-than-perfect credit. And remember, you can improve your
credit over time.
Myth: You need to put 20% down to buy
a home.
Fact: There are many types of mortgage products and programs
that allow low and no down
payments. But remember to factor in other costs such as closing costs,
property taxes, moving expenses, and repairs.
Myth: You can't buy a home in the U.S.
if you're not a citizen.
Fact: If you're a legal resident, you can purchase a home in
the U.S.
Myth: If you don't have a bank account
or credit cards, you can't qualify for a mortgage.
Fact: Having a bank account is always a good idea and helps
you establish
credit. However, lenders can approve you for a mortgage even if you don't
have a bank account or credit cards. You'll likely need to keep records showing
a history of payments you've made for items such as rent, utilities, and car
payments.
Myth: Lenders share your personal
financial information with other companies.
Fact: By law, banks and other financial institutions are
restricted in their uses and disclosures of information about you. In some
situations, you may choose to restrict the disclosure of your information if
you don't want it to be shared.
Myth: If you're late on your monthly
mortgage payments, you'll lose your house.
Fact: If you have a financial hardship, like the death of your
spouse or a medical emergency and fall behind, it's possible to keep your home
and get back on track if you contact your lender early.
Myth: You can't get a mortgage if
you've changed jobs several times in the last few years.
Fact: Not true. You can change jobs several times and still
get a loan to buy a home. Lenders understand that people change jobs. The
important thing is to show that you've had a stable income.