Are you tired of renting? Do you spend your spare hours
scanning real estate listings? If so, you’ve got some company. According to the
National Association of Realtors, over 35% of new homebuyers in 2015 were Millennials,
making them the largest group of buyers for two years running. As the economy
continues to recover from the events of 2008, it’s not just Gen X or Boomers
buying houses.
Still, the transition from renting to homeownership is a
major one, so it’s natural to have some trepidation about taking your first steps
away from your lease. To ease your mind, the apartment experts at ABODO
have broken down three of the most common myths that keep renters from
homeownership — as well as a few things to know, if you decide to make the
leap.
MYTH #1: Owning a
home is more expensive than renting.
Not necessarily. As demand for
rental properties has grown, so have rents. In fact, in 2015 rents nationwide
rose 4.6%, the largest increase in almost 10 years.
According to a recent study, it’s cheaper to buy a house
than rent in 42 states. Down payments might give you sticker shock, but more
often than not, a monthly mortgage payment will be comparable to (or less than)
rent, and at least you’ll be gaining equity. Plus, mortgage interest payments
are tax-deductible. This handy calculator from the New York Times can tell you if homeownership could actually save
you money.
MYTH #2: Goodbye,
savings.
After a downpayment, and mortgage
payments, and furnishings, and repairs, and maintenance, and property taxes…
saving money is a lost cause, right? Think again. Every mortgage payment that
pays down principal and interest is a kind of “forced savings account.” You
have to pay it, so you do. But unlike a rent payment, that money isn’t gone
forever. Assuming you don’t default on your loan and go into foreclosure,
you’ll see it again, albeit in a different form. Establishing equity in your
house is a long-term investment that will also make you eligible for new lines
of credit.
MYTH #3: You won’t be
able to get a loan.
Yes, the days of subprime lending
are over — and for good reason. After what happened from 2007 to 2009, banks
are understandably cautious about handing out large loans for new homeowners.
But that doesn’t mean it’s impossible to get a loan. In 2014, Fannie Mae and
Freddie Mac announced a new initiative, aimed at encouraging first-time
homeowners, that backs mortgages with extremely low down payments — as low as
3%. There are conditions, of course: Potential homebuyers must buy private
mortgage insurance and have a high credit score (at least 620). But such a low
down payment (the standard is 20%!) is a major help for younger homebuyers who
might still be paying off student loans.
Ready to go on a house tour? Wonderful. But making the
transition from renting to owning entails a lot more than just writing checks
and calling friends to help you move. There’s more to consider: from the
upfront costs involved to what happens if your dishwasher malfunctions and
spews food-flavored water all over your floor. As you start looking for your
new home, keep these three things in mind:
1.
Your upfront
costs will be higher.
Bid farewell to the security
deposit. When you buy a house, there are a few different fees to contend with.
The largest one, which poses one of biggest obstacles for hopeful home buyers,
is the down payment. The exact
amount depends on your mortgage, but expect to pay 10% to 20% of the home’s
value. Don’t have that kind of money? There are options to pay much less
upfront — sometimes as little as 3% — with private mortgage
insurance or a loan through the Federal Housing Administration.
Don’t forget about closing costs,
which average about $2,100 on a $200,000 home. These
costs cover several necessities: appraisal, land survey, home loan origination,
title insurance, home inspection, insurance escrow, and more.
2.
Monthly
payments go beyond mortgages.
Your mortgage payment can look
pretty similar to your rent check. But since your home is your largest
investment, you’ll want to protect it with insurance, leading to another
monthly expense. Sure, renters’ insurance was “highly recommended,” but homeowners
insurance is necessary to protect your investment, your belongings, and your
mortgage. Many lenders require it.
You’ll also want to tuck away
money each month for property taxes, which are usually a percentage of the
assessed value of the land and the structures on it. These rates are highly
localized, but the average household pays just over $2,000.
Although property tax is generally billed annually or semiannually, many
mortgage lenders require that money is put in escrow monthly for the tax.
3.
You are your
own maintenance crew.
Your maintenance budget now must
cover more than a package of lightbulbs and batteries for smoke detectors. As
an owner, however, plan on spending at least 1% of your home’s value on
maintenance projects each year. If unused, this cash will come in handy for
larger projects, such as a roof replacement. When you move in (and pretty
regularly after that) take inventory of the appliances you have and what kind
of shape they’re in. When was your furnace last inspected? Is the water heater
an original feature of your 1950s home? If so, put that heater near the top of
your list — above, for example, an air conditioner or dishwasher.
