By Chris Sloan, president of the Utah Association of REALTORS®
28 February 2009 - With the passage of the newest economic
stimulus bill and the implementation of an $8,000 tax credit for first-time
buyers, more people are weighing their options to decide whether home buying
makes sense. In fact, the National Association of Realtors estimates the
tax credit will spur approximately 300,000 additional home sales as on-the-fence
buyers decide now is the time to make a move.
With such strong financial incentives in place for first-time buyers, now
is the perfect time for anyone who has considered homeownership to calculate
whether buying makes sense. In fact, taking time to do the analysis now
will be especially beneficial since many of the current incentives, such
as the tax credit and possibly the super-low mortgage rates, will not be
available next year.
While there are many great reasons to make a home purchase, buying is a long-term commitment that isn't right for everyone. Consider the following questions as you determine whether you're ready to buy.
Can you afford homeownership?
Through the combination of lower home prices and cheaper mortgage financing
costs, homeownership has become considerably more affordable over the past
year. In fact, interest rates on a 30-year fixed-rate mortgage are one full
percentage point lower today than they were a year ago, according to Feb.
19 numbers from Freddie Mac. That means you would save more than $45,000
during the life of a $200,000 mortgage or you could increase your buying
power by 10 percent.
To see whether buying makes sense for your budget, start by determining
how much a home in your estimated price range will cost, and make sure to
factor in mortgage principal payments, interest payments, mortgage insurance
(if you have less than 20 percent down), homeowner's insurance and property
taxes. The general guideline is that you shouldn't spend more than 28 percent
of your income on your housing costs, and your total debts should not exceed
36 percent of your income. If you need help calculating these costs, contact
a mortgage professional.
Keep in mind, however, that mortgage interest and property taxes can be
tax-deductible so these costs may actually be lower. Assuming a 28 percent
tax bracket, you can make a mortgage payment - including taxes and insurance
- that is approximately one-third larger than your current rent payment
for the same amount of money because of the tax deductions, according to
the National Association of Realtors. But make sure to consult your tax
professional regarding the deductibility of any homeownership-related expense.
Along with determining the costs of homeownership in relation to your income,
you need to assess your down payment funds and your credit score. While
there a still a couple programs out there that will provide 100 percent
financing, most lenders require some sort of a down payment. FHA loans require
3.5 percent, and conventional loans typically require at least 5 percent.
For an FHA loan, your credit score should be at least 620. For a conventional
loan, it shouldn't be lower than 700.
How long do you plan to stay?
In general, the longer you plan to stay in a home, the more financial sense
it makes, with the rule of thumb saying you should keep the home at least
five years. That's because there are a number of transaction costs involved
in buying or selling real estate. The longer you stay, the more these costs
are absorbed, and the greater the opportunity for your home to increase
in value.
The New York Times has a useful calculator that will help you determine how long it will take to reach the break-even point. Visit NYTimes.com and search for "Is It Better to Buy or Rent?" to access the calculator.
Have you considered the intangibles?
Of course, home buying isn't just about the numbers. There are considerable
intangible benefits that should be considered as well. Like the fact that
you won't have to get your landlord's permission to remodel or worry about
losing your deposit if you pound a nail in the wall.
Homeownership also creates stability for your family. In one study by the
Harvard Joint Center for Housing Studies, the children of owners achieved
math scores up to 9 percent higher than the children of renters, reading
scores up to 7 percent higher and reductions in behavioral problems of up
to 3 percent. Other studies have linked homeownership to lower crime rates
and greater community involvement.
For more information on homeownership or to learn about the home-buying opportunities in your area, contact your local Realtor or visit www.UtahRealtors.com.