Renting or Buying a Home – Pros and Cons
For the majority of hopeful homeowners renting or buying a home comes with its own set of pros and cons. The struggle to accrue enough money to afford the initial expenses of purchasing a home is a major barricade and the restrictions to renting can be problematic. Low barrier loan programs, although popular, also require a buyer to have some cash on hand to complete their purchase. At the same time, purchasing a home provides the buyer with control over rising housing costs, and a mortgage loan with a fixed rate ensures that one will have the same monthly mortgage payment for the next 30 years. While renting requires you to pay the mortgage of your landlord, you aren’t responsible for any maintenance issues and the only payment you make each month is your rent – no taxes, no insurance.
There is no denying that purchasing a home is expensive, but with the right moves, you can reduce the overall cost of your home, avoid paying your landlord’s mortgage and turn your home into an investment.
1. Avoid paying for PMI.
If you will be borrowing more than 80% of a home’s value, then the lender will require you to have private mortgage insurance, which typically runs between .5% and 2% of the home’s value. If you have a loan balance of $150,000, you could be paying as much as $1,500 in PMI fees each year. The most obvious method of avoiding paying PMI is to put down a down payment of 20% on your home. If you’re finding this difficult to save for, consider purchasing a less expensive home.
2. Know your closing costs before you close.
When you purchase a home, it is expected that you will be required to pay a specific amount in closing costs. Closing costs often include appraisal fees, title search fees, and credit check fees, among others. In general, closing costs will average 2% to 5% of the home’s value. The actual amount will depend on where the home is located. In a low tax community, the amount might be as little as 1%. In a major metropolitan area, the total cost could be as high as 5% to 7%.
3. Make one time extra payments.
If you receive a tax refund, small inheritance, a large bonus, or other form of unexpected income, allocate some of the funds towards your mortgage loan. For example, if you were to pay an additional $1,000, your loan’s balance will be $1,000 lower than it would have been for each remaining month. In other words, if your loan has an interest rate of 5%, you will be able to save an extra $50.00 in interest cost each year until the last mortgage payment is made. Over time, this can significantly add up.
4. Make sure that you have the right kind of mortgage.
Most home buyers opt for a 30 year mortgage because it is the most well-known mortgage type; however, choosing a different option can save you a considerable amount of money over time. Choosing a 15 year mortgage will enable you to pay off your loan much more quickly. Alternately, if the monthly mortgage payments on a 15 year loan would be too expensive for you to manage, you can choose a 30 year loan and make additional payments towards the principal. Either way, you’ll be mortgage free much quicker.
5. Have your property taxes reduced.
Finally, property taxes do not technically fall under the umbrella of a mortgage loan; however, mortgage payments often include money that is placed into escrow to cover insurance costs and property tax bills.
If you believe that your land or home may be worth less than what the assessor has previously said, do not hesitate to ask for a review. Having the assessment changed will lower your property taxes, and your loan provider will adjust your monthly payment to reflect the new assessment.
What has been more beneficial for you – renting or buying? Share in the comments below.