Uncategorized Archives - Robert Johnson -Mortgage Loan Officer

Renting vs. Buying: Navigating the Home Ownership Decision

Your decision to rent or buy the home where you choose to live involves more than just financial considerations.
Let’s look at what most people typically think about when considering their options.

Down Payment Myths and Realities

Many potential homeowners believe they can’t afford to buy due to the down payment hurdle. However, this isn’t always the case. Numerous down payment assistance programs exist, some even providing checks at closing. Therefore, let’s set aside the down payment issue for now; homeownership is attainable even without a significant upfront investment.

Breaking Down the Costs

Consideration	Renters	Homeowners
Monthly Payments	Straightforward, often includes utilities.	Complex, includes several components:
– Mortgage Payment	N/A	Includes principal and interest.
– Property Taxes	N/A	Varies by location, typically around 1.1% of assessed value. See Addendum A for details.
– Home Insurance	N/A	Averages about 0.6% of home’s replacement cost. See Addendum A for details.
– Maintenance	No direct cost: landlord handles maintenance.	Significant; it averages about 2.5% of home’s cost annually. See Addendum A-1 for a detailed calculation.
– Other Costs	Might include renter’s insurance.	Includes HOA fees, additional insurance, assessments. Add utilities if not included in rent comparison.

Renting: Throwing Money Away?

We often hear from people that when you rent, you are just throwing your money away or making the landlord rich. Is that true? If you can rent a $1 million home for $5000 a month, that is a lot cheaper than buying the home. If you consider quality of life issues, then renting in that instance might make sense. Another factor is the opportunity costs of the capital you place in the house instead of in other possibly more appropriate investments. If you consider the landlord, their gross revenue is $60,000 per year, probably netting closer to $30,000 after expenses. That is only a 3% return on an asset worth $1 million. Yes, there is appreciation, but that is not certain.

This is the issue of mixing investment opportunities with where you live. Your decision to rent or buy a residence runs much deeper than down payments and monthly costs. There are times to buy and other times to rent; understanding and evaluating your specific situation are key to deciding which is better for you and your family.

Source: www.Zillow.com

These homes are all located in West Hartford, CT. This is purely for demonstration purposes, but it underscores an important point: each of these homes are similar in many ways. Financially, buying makes sense at the low end of the market, while renting is more advantageous at the high end. Considering all other factors are equal knowing this might help you decide which way to go.

A Rule of Thumb:

If your housing budget is $4,000 monthly, for example, you could compare what you’d rent for $4,000 against what you could buy for $400,000. This example uses $4,000, but you could use any number for your max housing budget. If your chosen budget aligns with the median home price in the area, the costs will be roughly comparable. If it’s at the low end of the market, buying is likely better; if it’s at the high end, renting might be more economical.

This is just an extreme example. To have such problems, right? Whether to rent for $29,500 a month or buy the $12 million home. Maybe this example will help the rich too.

Beyond the Numbers

Appreciation: Real estate generally appreciates, but let’s take a closer look so that you have a better
understanding, look at these two graphs from the Federal Reserve

1. Looking at this graph you might think prices of homes are
never going to go up again. But that is not what has happened in the
past. Over time real estate has expereinced appreciation.

www.fredblog.dtlouisfed.org

This graph shows that housing prices do go up over the long term, but short term is too hard to These are nationwide numbers, which I guarantee are different than what you will experience in your area.

Source – https://fred.stlouisfed.org/series/MSPUS

These graphs seem to show conflicting information. Real estate, as an asset class, appreciates over longer periods of time, but can depreciate in the short term. The longer you stay in the home, the better chance you will have that the home appreciates. We’ve stated that the home is often the largest asset in a family’s portfolio, and that can get confusing because it is also where you live. People simply do not think of their home the same way as they do other assets like stocks, or bonds, or even other rental properties.

The point here is to do your best to be smart about home ownership. If your time frame is short, less than ten years, do your best to buy right. If you are handy, try to make improvements that matter to value. Buy what will sell later. For instance, modern openly designed homes with a nice kitchen and master bedroom sell faster than geodesic domes with the kitchen in the basement (I know, extreme example). Homes at the end of cul-de-sacs sell quicker than a house on a busy street. Your realtor should know this stuff, but the point is made.

Lifestyle and Practicality: In the U.S. it turns out that the average homeowner stays in their homes 11 years, and that the trend is that number is getting longer. I mention this only because, as we saw at the higher end, the nicer homes, the better neighborhoods etc. it can be much cheaper to rent those homes. You have more money to raise your children, to invest in other assets etc., and more flexibility if you need to move for work or get into a larger home as the family grows.

Conclusion

While financial metrics are crucial, personal circumstances like job stability, family size changes, and personal interests in home improvement also play significant roles. By understanding these factors, you’re better equipped to make an informed decision on whether to rent or buy. Remember, these guidelines are general; your situation will absolutely require a more detailed and studied approach.

Addendum A: Property Taxes and Homeowners Insurance in the U.S.

Property Taxes:

Property taxes in the United States vary significantly across states and localities, influenced by factors such as local budgets, tax structures, and state tax laws. As of recent data, the average effective property tax rate nationwide is approximately 1.1% of a property’s assessed value. This translates to an average annual property tax payment of around $3,719 for a single-family home.

However, these figures can differ widely depending on the state. For instance, New Jersey has the highest effective property tax rate in the country at 2.23%, resulting in a median property tax bill of nearly $9,000 in 2023. In contrast, Hawaii boasts the lowest effective property tax rate at 0.32%, with the typical homeowner paying only about $2,000 in property taxes.

Given the significant variation in property tax rates and housing values across the country, the median property tax payment can differ substantially from the average. While specific nationwide median figures are not readily available, it’s evident that homeowners in states with higher property values and tax rates will pay more, whereas those in states with lower values and rates will pay less.

It’s important to note that property tax rates are subject to change due to local government decisions, budgetary needs, and shifts in property assessments. Therefore, for the most accurate and current information, it’s advisable to consult local tax authorities or recent state-specific data.

Homeowners Insurance:

Homeowners insurance premiums in the United States vary based on several factors, including the home’s location, size, age, and construction materials. As of recent data, the average annual premium for a policy with $300,000 in dwelling coverage is approximately $1,915.

The cost of homeowners insurance is closely tied to the estimated replacement cost of the home, which is the amount it would take to rebuild the home with similar materials and craftsmanship. This replacement cost is a primary factor in determining the dwelling coverage limit of the policy, and higher replacement costs generally lead to higher premiums.

In addition to the home’s valuation, other factors influencing insurance premiums include:

Location: Homes in areas prone to natural disasters, such as hurricanes, wildfires, or floods, often face higher premiums due to increased risk.
Home’s Age and Condition: Older homes or those in poor condition may have higher premiums due to the increased likelihood of structural issues or outdated systems.
Claims History: A history of frequent insurance claims can result in higher premiums, as it indicates a higher risk to insurers.
Credit History: In many states, insurers consider a homeowner’s credit history when determining premiums, with better credit often leading to lower rates.

Maintenance:

For detailed calculations on home maintenance costs, please refer to Addendum A-1.

Addendum A-1: Proposed Formula for Home Maintenance Costs

Annual Maintenance Cost=(B×V)+(A×C)+(L×S)

Where:

B = Base maintenance rate (1% to 4% of home value, depending on condition)
V = Home value (market or replacement cost)
A = Age factor (percentage increase in cost per year, e.g., 0.5% per year over 10 years) • C = Condition multiplier (scale from 0.8 for excellent to 1.5 for poor) L = Location risk factor (scale from 0.9 for low-risk areas to 1.3 for high-risk areas) • S = Size factor (cost per square foot for maintenance, e.g., $1.50 to $3.00 per sq. ft.)

Example Calculation

For a 20-year-old home in average condition valued at $400,000, in a moderate-risk location with 2,500 sq. ft.:

(0.02×400,000)+(0.005×20×1.2)+(1.1×2,500)

8,000+120+2,750=$10,870 annual maintenance cost

Additional Considerations

Major System Age: Roof, HVAC, plumbing, and electrical upgrades impact costs.
Climate Factors: Homes in extreme weather zones need more maintenance.
Luxury vs. Standard Materials: High-end finishes may cost more to maintain.

Down Payment Assistance (DPA) programs are designed to help individuals or families overcome the barrier of saving enough money for a down payment on a home. Here’s an overview of who these programs are typically for, who they might not be for, and the types of programs offered:

Who are DPA programs for?

First-time Homebuyers: Many programs are specifically aimed at those buying their first home, though definitions of “first-time” can vary.
Low to Moderate Income Buyers: Programs often have income limits to ensure they’re helping those who would otherwise struggle to afford a down payment.
Specific Demographics: Some programs target veterans, teachers, first responders, or other professionals, or people living in certain areas (like rural zones for USDA loans).

Who are DPA programs not for?

High-Income Buyers: Those whose income exceeds the program’s limits.
Repeat Buyers: Most programs are not for those who already own a home, unless they meet specific criteria (e.g., not owning a home in the last 3 years for some definitions of “first-time buyer”).
Investors: Programs generally do not support the purchase of investment properties.

Types of DPA Programs:

Grants: Money that does not need to be repaid, often for first-time or low-income buyers.
Forgivable Loans: Loans where the balance is forgiven after a certain period or under certain conditions (like living in the home for a specified time).
Deferred Loans: No payments or interest until the home is sold or refinanced.
Low- or No-Interest Loans: Loans for down payment with very low or no interest, which might need repayment upon selling or refinancing the home.

Here is a tabular comparison of DPA in relation to different loan types:

Feature	Conventional	FHA	VA	USDA
Availability of DPA	Available through various state and local programs, often paired with low down payment options like HomeReady or Home Possible.	Common; many DPA programs are FHA-compatible due to FHA’s lower down payment requirement.	Less common due to no down payment requirement, but some states offer DPA for closing costs.	Available; often used in conjunction with USDA’s zero down payment option for rural properties.
Eligibility	Typically for those with good credit, sometimes requiring a first-time homebuyer status or income limits for certain programs.	More flexible credit requirements, not necessarily for first-timers, but often used by them due to low down payment.	Military service members, veterans, and some surviving spouses; no down payment needed, so DPA focuses on closing costs or other expenses.	Must meet income limits and purchase a home in a USDA-eligible rural area.
Down Payment Requirement	Varies; some programs allow as low as 3% down.	3.5% minimum down payment.	No down payment typically required.	No down payment required.
Type of Assistance	Grants, second mortgages, matched savings programs.	Often grants or second mortgages with deferred or forgivable terms.	Grants or loans for closing costs.	Grants or loans, often for closing costs since there’s no down payment.
Repayment	Varies; some are repayable, others are grants or forgivable loans.	Can be forgivable or deferred, tied to conditions like living in the home for a set period.	Typically for closing costs, potentially forgivable after a period.	Similar to FHA, often forgivable or deferred with conditions.

Remember, the specifics of these programs can vary widely by state, local housing authorities, or lenders, so it’s crucial to investigate local options for the most accurate information. Would you like to learn more about specific DPA programs available in your area?

If you would like to apply for a DPA loan, or if you just have some more questions, please give me a call, 781-724-4868

Robert Johnson

MLO, Nexa Mortgage

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