When is the right time for renters to transition from a lease to a mortgage?
Renters are feeling stretched. As they fork out what Zillow says are the highest monthly rental costs in history, renters are also watching real estate owners get richer at their own expense. So how do you know when to say enough is enough, and kick renting to the curb?
Zillow suggests that U.S. renters are now paying double for monthly payments than homeowners. If you can afford to pay rent in this market, you can probably afford monthly mortgage payments of your own. Remember, you are paying a mortgage right now; you are just paying your landlord’s mortgage instead of your own. Some would argue that it is crazy to pay more to rent than to own. Which side of the fence are you on? Chances are; you can afford to buy and don’t even realize it yet.
While few actually understand much about the home buying process or homeownership, it is a topic that everyone should be familiar with. You don’t have to understand all of the intricate details, but you should know what the home buying process is like, what your responsibilities are as a homeowner (i.e. minimum standards of maintenance), what all of your costs will be, and what surprise expenses might arise. Will you need insurance? Will there be any association dues? Will you be responsible for replacing the A.C. unit if it goes out?
The biggest challenge in buying a home for most renters is trying to save up a down payment while paying such absurd rental rates. The good news is that there is an increasing number of low and no down payment home loan programs. Many advice columns out there highlight that it can be best to put down 20% on a new home. A down payment can help reduce monthly expenses, and create more flexibility – should you want to move or sell the place. Still, that isn’t realistic for most renters. They just can’t save that kind of money until they become homeowners. Buying now, even with little down, can help accelerate savings, equity build up, and wealth building. Provided you can afford to hold onto that home and pay the monthly expenses, you should be fine.
More important than a down payment, however, is having a couple of months’ worth of payments stashed for emergencies. It can sometimes be necessary for qualifying, and you never know when something is going to come up. This will help to ensure you can hold onto your investment.
If you are about to go through a divorce, file bankruptcy, be sued, get hit with a federal tax lien, or are far behind on current financial obligation, it may be smart to wait to buy until the worst has passed. You don’t want to lose it right away, or end up paying for a property you don’t have any more, while paying for somewhere else to live too.
For most renters, this is the time to buy a home. You may want to brush up on your knowledge of the home buying process, and stash a couple months’ worth of payments, but you’ll probably be far better off as an owner than a renter. For most, the only way to get ahead financially is to become a real estate owner. The longer you rent, the further the chance to get ahead escapes from your grasp.
If you aren’t ready to buy a home, and aren’t ready to be tied down, consider investing in a few income properties so that you can change the dynamics of your finances.
If you are ready, focus on finding a property you can afford, or – at the very least – afford to rent out. That way, you should always be glad for making the investment.