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Sunday, 21 July 2019
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This Old House - Do-it-Yourself

Renting: The First Step Towards Home Ownership

Written by Posted On Thursday, 11 July 2019 18:59

Whether renting is better than purchasing a home is a debate that is not as simple as distinguishing between black and white. Due to diverse circumstances and even more diverse housing market options, the decision to buy a home is more of a logical choice based on your individual requirements. While homeownership may seem like a distant dream for the renter, the average owner buys their first home by age 32. 

While you might not be ready to purchase a home now, it doesn’t hurt to start preparing for this huge step early. Of course, you need to go through the preliminary steps such as creating a budget and saving for the down payment. Below are a few other advanced actions that you can implement while renting so you are in a better position when you are finally ready to purchase a home. 

Understand the Cost of Homeownership

In your current position as a renter, the rental fee you pay covers your housing requirements for the entire month. However, as a homeowner, you need to factor in other costs that will be going into your monthly housing pay needs. These cost factors are Principal, Interest, Taxes, and Insurance – in short PITI. 

The first step to home ownership while renting is understanding these costs so you are in a better position to determine how much house you are likely to afford. The principal and interest figures are your monthly mortgage payments. While the principal pays down your loan balance every month, interest is the fee payment for the money you borrowed. 

Tools such as a mortgage calculator can help you find out how much of the payment you are making makes its way towards the principal versus interest you are paying monthly. Taxes are the property taxes assessed by your home county annually – usually about 1.2 percent of the home value.  Insurance is paid out to your preferred cover provider and is required if you are getting a mortgage. 

The insurance cover helps cover costs that go into home rebuilding in case of disasters such as a fire. The replacement cost is determined by the insurer should be agreed to by the lender. In many cases, the insurance costs will range anywhere from $700 to $1,200 a year for the single-family abode. 

Condo owners should be prepared to cover Homeowners Association (HOA) dues. The amounts are used for covering common area amenities, ongoing upkeep, landscaping, and reserves for possible maintenance tasks like exterior painting. 

If you are purchasing a single-family house, you can borrow a few things from HOA budgets, which have at least 10 percent going to reserves. While you may not be interested in purchasing a condo, having a similar savings plan will help you cover future maintenance costs such as roof replacement and upgrading appliances. 

Understand Homeowner Tax Benefits

While filing your annual tax returns, keep in mind that property taxes and mortgage interest are deductible, and they reduce the taxable income. Such deduction help reduce the overall cost of owning a home.

For instance, if you have a $400,000 home that requires a 20 percent down payment 30-year mortgage at 4 percent, the PITI monthly is $1,861 (using the mortgage calculator above). In this case, tax deductions can help reduce the total cost of homeownership by a few hundred dollars. 

Which is Better: Renting or Buying? Do Your Math

In many cases, people often compare homeownership versus renting by comparing the PITI to the rental payment they make. However, in order to get a true peaches-to-peaches comparison, it’s critical you look into the after-tax benefits of homeownership versus the rental costs. 

For instance, the $400,000 home above will cost you about $1,250 each month after taxes, and compare this to a rental that costs around $1,230. If your $400,000 home offers more spacious interiors and exteriors, or it is in a good neighborhood, the math is all in favor of purchasing – but keep in mind that you will require an $80,000 down payment. 

How to Identify Mortgages Within Your Budget

In case you don’t have the 20 percent down payment amount, you have the choice of making a 3 percent payment. In such a scenario, you will be required to pay for mortgage insurance, which is around 0.85 percent of the loan amount and not included in tax deductible. 

Budget, Cost, Dollars, Expense, Home, House, Household

Including mortgage insurance, the monthly PITI is around $1,858 on a $400,000 structure with 3 percent down on a 30-year-old mortgage with 4 percent. Upon tax deductions, the cost of housing drops to about $1,500, and you will need to make a $12,000 down payment. 

You have the option of lowering the rate and PITI using 5-year ARM short-term loan; however, such loans adjust every 5 years. This leaves you exposed to higher payments in case you intend to stay in that home longer. 

Prepare Your Credit Score

Credit scores are important when shopping around for the lowest rate of mortgages. After all, all lenders want is to ensure that you can make reliable, on-time payments and have a dependable credit path. 

The more credit accounts you have the better, so if you have one credit card as a renter, you should possibly be looking into attaining more credit. However, the credit score is likely to drop by between 5 and 15 points as soon as you have a new account, and you have to get back to creating a good payment history. 

Learn New Skills

Preparing for homeownership is not all about financial planning. Owning a home comes with a set of new responsibilities that you may have never dealt with as a renter. Now is the perfect opportunity to enroll in local handyman clubs, you can find out more info if you visit their website.

Learning such skills before home ownership helps reduce the risk of trying to fumble through online instructions while in the middle of a high-risk situation. A few hardware stores such as Home Depot host DIY workshops that are a great place to earn new home maintenance skills. 

Get Started Today

Purchasing your first home is an exciting project, but it can also be a stressful period. Current circumstances, as well as your local market, are some of the reasons why you may choose to rent for a season, but finances for your home require planning.  

In addition, the more planning you capable of doing now, the better for you. Whether a home purchase is in the cards or a possibility in the future, the steps above can be implemented now so that you have a good shot at making your dream a reality sooner than you had thought possible.

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