Is it better to buy or rent your home?
The answer isn’t the same for everyone. In this article, we unearth the benefits and responsibilities of renting a home versus buying one.
You can absolutely start looking for a house before you’ve pre-qualified for a mortgage. However, there are multiple reasons to get pre-qualified before you start shopping. Pre-qualifying for a home lets you know roughly how much you can afford to spend. It also helps sellers know that you’re serious when you want to make an offer. If you’re shopping in a competitive market, being pre-qualified can give you an edge in negotiations, and help move the process along more quickly.
It depends. Homes have historically been considered safe investments because they have tended to appreciate in value. If you plan to stay in one place for a while, buying a home could save you money in the long-term compared to renting. However, there are places where renting can be significantly more affordable than buying. Renting also saves you many of the costs and headaches of homeownership, such as property taxes and home maintenance.
When it comes to calculating your monthly mortgage payment, there are more factors than just the home’s sticker price. Your mortgage’s interest rate, the length of the loan, and the cost of any insurance premiums and property taxes all factor into what you’ll actually end up paying each month. Consider your monthly income and other living expenses very carefully before making a decision. Many experts recommend sticking to a mortgage payment that’s less than 30 percent of your monthly income.
In most cases, you’ll need 20 percent of a home’s sale price as a down payment if you want to avoid paying for private mortgage insurance (PMI). However, some specialized loan programs allow you to get a mortgage with a much smaller down payment and no PMI. Federal Housing Administration (FHA) loans, for example, allow for as little as 3.5 percent down. Loans backed by the Veterans Association (VA) sometimes don’t require any down payment at all.
Your monthly mortgage payment will always consist of the principle and interest you pay toward the loan (also called P&I). Depending on your lender, other elements may include private mortgage insurance (PMI) and payments to an escrow account where your lender holds money to pay for property taxes and homeowner’s insurance. To figure out your P&I, you’ll need the total amount of your loan, your interest rate, the type of loan, and how long it will take to pay the loan off. Plug those numbers (or estimates for them, if you’re shopping around and getting a handle on things) into our mortgage calculator. To make budgeting as realistic as possible, it’s a good idea to divide your annual costs for taxes and insurance by 12 and figure that into your monthly payment as well, even if your lender doesn’t require you to use an escrow account.
Generally, the higher your credit score is, the lower your interest rate will be. So it’s important to get a copy of your credit report from one of the top credit bureaus (Equifax, TransUnion, or Experian), then check it carefully for any inaccurate information that could cause your bank to think you’re a riskier borrower than you actually are. If you find any errors, contact the credit bureau to correct them.
Your ability to afford your monthly payment is a big consideration when it comes to deciding between 15-year and 30-year loans. Shorter loans tend to have lower interest rates than longer loans, which means the total cost of the loan will be lower over time. You’ll also own the house (and stop having to make mortgage payments) much sooner. But paying off a loan more quickly also generally means a higher monthly loan payment, which can be more of a challenge to fit into a household budget.
Once you settle on a house and sign a contract, you’ll still need to wait for the mortgage application process to go through before you can close on the sale and move in. Depending on your lender, this process will likely take at least 30 to 45 days from the date you apply, assuming you provide all the documentation your lender requests in a timely manner.
When you buy a house with a down payment lower than at least 20 percent of what your house is worth, your lender will typically require PMI. In exchange for paying a premium, the mortgage insurance company limits your lender’s losses if you fail to make mortgage payments. Once your principle payments have given you home equity equal to 22 percent of your house, your lender should cancel your PMI policy automatically.
A qualified home inspector will give you an objective assessment of the condition of the property you want to purchase. That’s important, because nobody wants to move into a new home only to end up making expensive repairs, like buying a new roof or replacing a balky heating system. If an inspector identifies a problem, talk to your real estate agent—you’ll usually have the option to negotiate the price of the house or ask the current owner to make repairs before you close.
A title is a legal document that proves you own your property. A title company will do research to make sure nobody has an outstanding claim on a property before it’s sold. Your lender will require you to purchase title insurance to protect them if the title company misses something and your ownership comes into doubt. You can also purchase title insurance that protects your own interest in the property, if you wish to do so.
Generally, no. If you’re planning to build a house or to do significant construction on an existing house, you’ll need to apply for a construction loan, which has different requirements than a home mortgage. Some construction loans, called construction-to-permanent loans, transition from construction loans to traditional home mortgages once the home is built. If you’re only looking to do some rehab on a home, some specialized mortgage programs allow you to roll initial rehab costs into your mortgage.
Construction-only loans cover just the cost of the construction, and are generally short-term loans, expected to be paid in full within a year or so. Construction-to-permanent loans transition from a construction-only loan to a typical home mortgage once the construction is complete. For those who’ve already built up equity in their home, a home equity line of credit, or home equity line of credit (HELOC), can be used to fund smaller projects.
The amount of time it takes to build a house depends on the scale of the project, the location, your contractor’s schedule, and how long it takes to get all necessary permits. However, you can generally expect building a home to take anywhere from three to six months. Some homes will take longer than that, but construction loans generally limit construction to one year, which can serve as an upper limit.
Refinancing your mortgage means taking out a new loan to pay off your existing loan. This approach can lower your monthly payment, but it can also extend the length of your loan and subject you to closing fees. Be sure to calculate the total cost of a prospective new loan, including closing costs, extra interest, and any other fees. Then compare that to what it would cost to pay off your existing mortgage. Don’t forget to figure in any positive impact from reduced monthly payments, which might also affect your final decision. It’s often a good idea to speak with a financial advisor for help, especially if the decision seems difficult.
You can use a cash-out refinance for any purpose, including home renovation. It’s always a good idea to look into all your alternatives, however. If you’ve been making loan payments for a while and a refinance would not change your interest rate significantly, another option such as a home equity line of credit (HELOC) might make more sense.
When you refinance your mortgage, you take out an entirely new loan on your house and use that to pay off your existing mortgage. Then you start over with the first payment on your new loan. By contrast, a HELOC allows you to take out a loan using equity you’ve built up over time as collateral. Just keep in mind that a HELOC is a separate loan from your mortgage, so any payments you make on it will be in addition to your monthly mortgage payment.
Remodeling a house can improve its resale value, but there’s no guarantee. Upgrading a kitchen or a bathroom can make your house more attractive to a potential buyer, but tastes differ, and preferences change over time. Keep in mind that remodeling can also improve the value of your house to you while you live there, even if it doesn’t boost your eventual resale value.
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