SUMMARY: Should you rent or buy a home? Everyone's situation is different, so you need to consider your own housing needs, savings, and income before making a decision. Some financial conditions have changed due to the pandemic's effect on the US economy, particularly in Texas. All of these factors should help you determine whether renting or buying is your best bet. Both renting and buying a home have their advantages. The cost of either is part of the equation, but there are other factors to consider.
Renting a home
Renting a home is the better choice if you plan to live in a certain location for a short time. But renting, also has other advantages, including:
- Low initial investment - You generally need first month's rent, last month's rent and a security deposit to get into an apartment. While that can still add up to a significant chunk, it is far less than the initial investment required to buy a home.
- Less responsibility - When you rent, you don't have to worry about costly home repairs or outside maintenance. You get the comfort of the residence without the obligation.
- Earnings potential - You can earn money by investing your monthly rental savings into a savings account with a decent return.
- Low insurance costs - You are free of property taxes, and renters insurance is much cheaper than homeowner's insurance.
- Flexibility - Renting allows you to move around and see the country or even the world. You are making only a short-term commitment of a year or less in most instances.
Buying a home
Buying a home also offers several advantages. Of course, you get to enjoy owning your property and the freedom that brings. But you will also see these benefits:
- Investment return - If you buy wisely, your home should grow in value through the years. Although the housing market has slowed in recent years, prices still rose by 5.7% in 2019.
- Tax Breaks - Unlike renting, buying comes with several tax breaks. Usually, mortgage interest and some closing costs are tax-deductible, as are mortgage insurance and property taxes.
- Equity Growth - Homeownership often forces you to improve your financial picture. Every time you make your house payment, you are growing your equity. As a renter, you have more choices about how you spend your money. You may choose to save, but you may also choose to spend on wants instead of needs.
- Improved Mental Health - Studies have shown that homeowners may see intangible benefits from their purchase, such as better mental health and higher education levels for their children.
If you decide to buy, you will find various mortgage programs available to you, many with particularly favorable rates in 2020.
TDECU has options for Texas buyers that make homeownership easier than ever. They include conforming loans, or mortgages that are "equal to or less than the dollar amount" limit set by the Federal Housing Finance Agency or FHFA. They must also meet Freddie Mac's and Fannie May's funding rules. These loans offer excellent low-interest rates for people with excellent credit.
An FHA loan is a mortgage that is insured by the Federal Housing Administration or FHA and aimed at low or moderate-income homebuyers. If approved for an FHA loan, you'll benefit from lower down payment minimums and a lower required credit score.
Veterans can benefit from Veteran Affairs (VA) loans that guarantee part of loans provided by approved lenders. These loans are for active duty, veterans and their families, and they have very favorable terms. They require no down payment, no mortgage insurance, and low closing costs.
However, no matter how long a customer’s hard-earned money stays in their checking account, they should still look for an account that does them favors and a bank or credit union that appreciates their business. But just how do you find this, how do you determine which financial institution to pick?
First-time home-buyers programs
First-time homebuyers can benefit from several special programs designed to make homeownership more attainable. These options include:
- US Department of Agriculture - The USDA offers an assistance program that helps first-time buyers purchase a home in certain rural areas (these properties do not have to be agricultural). Often, no down payment is required, and the loan is fixed. Income limitations apply.
- VA loans - These loans also help first-time buyers who are active-duty military members, veterans or surviving spouses get loans with no down payment, low-interest rates. Borrowers aren't required to buy private mortgage insurance or keep a minimum credit rating.
- State first-time borrower programs - Each state determines its programs. In Texas, borrowers can participate in the My First Texas Home program that includes down payment and closing cost assistance of up to 5% of the loan.
- This program, combined with the Texas Mortgage Credit Certificate Program that gives residents a "dollar-for-dollar" reduction on their federal tax liability.
Texas residents can also benefit from the My Choice Texas Home program which is open to all eligible homebuyers. It offers down payment and closing cost assistance up to 5% of the loan.
Fannie Mae and Freddie Mac - These two federal loan programs are excellent for first-time homebuyers, allowing perks such as a 3% down payment. They work with local lenders and offer loans to many eligible buyers, not just first-time homeowners.
Whether you rent or buy, you'll have to complete a process that includes putting down money on your home or apartment choice and qualifying for either a loan or a lease. In many cases, you'll have to open up your financial records and undergo a background check before taking occupancy.
Renting an apartment or a home can be done on your own, although many people use the services of a realtor to find the residence that suits their needs. Before contacting a realtor, you need to figure out what you can afford. Usually, you'll need an initial sum of first and last month's rent plus a security deposit. You should also check your credit score since many property management companies only take renters with a certain level of credit. And remember, you'll need to pay your rent and pay for utilities, in most instances. Experts recommend not spending more than 30% of your gross income each month on rent to ensure that you can make the payments. However, your other financial obligations may dictate a lower percentage is appropriate for you.
Purchasing a home is a much more complicated process than finding a rental. You have to go through several steps before finalizing a purchase.
First, you should determine how much you can afford to spend on a house. A general rule is 2.5 times your annual income, but as in rental calculations, this rule may not apply to your specific financial situation. According to Forbes, you should consider the following factors:
- Credit Score - Lenders use this figure to determine their risk. A lower score will affect how much you can borrow and what your interest rate will be - if you can get approved at all.
- Debt-to-Income ratio - Lenders will look at your monthly financial obligations, such as credit card and car loan payments. You can have a healthy salary but be too burdened by debt to obtain a favorable mortgage.
- Down Payment - The bigger the down payment, the better your position is. A large initial investment makes you a better risk and may also lower your monthly payments. Lenders feel better about their exposure if you have something to lose as well.
It would help if you also looked at housing prices in your area. In certain areas, the cost of rent is so high that buying a house will save you significant sums. In others, the cost of buying a home makes renting the better option. Do the math and find out if buying is the best route for you to take.
In addition to the above, you'll need to allow for closing costs, insurance premiums, property taxes, and maintenance. You need to know the full extent of your financial obligation.
Your home search will be simplified if you are pre-approved for a mortgage through a lender like us. Then, you'll know exactly what you can spend, so you simplify the realtor's job and also make yourself more attractive to sellers.
Although you can search for a home yourself, you are better off with an experienced realtor who can line up suitable homes for you to view and protect your interests in the actual purchasing process. Once you find the home you want, your real estate expert will draft an offer for you, one that will be tempting to the sellers and good for your needs. They may add contingencies to the offer, which are things that need to be addressed before the sale, such as repairs. The sellers may come back with a counteroffer. The negotiating process can take some time.
Once your offer is accepted, home inspectors will check out the residence to make certain there are no problems with the wiring, roof, etc. If there are, you may have to negotiate repairs with the seller. You can set the closing date once you have cleared the inspection.
Closing is when all the papers are signed and the house changes hands. Unless something unexpected arises, you should leave the closing as the proud owner of a home.
Your situation determines whether you should rent or buy. Renting is a less complicated process, but you still have to consider this option carefully.
Buying a home is a more complex procedure, but for many, it is the best choice. Right now, interest rates are low and several federal and state programs exist to help you finance a home. Texas and TDECU, in particular, are working to make it easier for residents to buy their dream home.
A TDECU mortgage offers you low-interest rates provided by a trusted lender. We have years of experience in the housing market and are current with the latest lending programs. To apply for a TDECU mortgage, fill out an online application, download the Mortgage Simplified App or call (877) 774-2657 today.