There are a lot of things to think about when contemplating purchasing a first home. One question that often comes up is concerning monthly expenses. Would it be cheaper to rent rather than take on the cost of mortgage payments, etc.? Or would monthly expenses be lower by buying a home rather than renting? This is one of the most important questions would-be first time homeowners consider.
The truth is, the answer isn’t always simple because there are many variables at play that could tip the scale one way or another. That is why it is crucial to understand the costs associated with renting or buying; what that might mean for your budget in the short term and long term is crucial to ensure you make the best decision possible. The more time you take to identify opportunities in the market versus what you can afford, the easier it will be to decide whether to rent or buy.
For this article, we’ll look at the different factors that can come into play regarding monthly expenses and whether renting or buying could be the better decision for your individual circumstances.
Compare Properties
The first thing that needs to be considered in the debate around monthly expenses is the properties themselves. It is not unusual for a monthly mortgage payment to be lower than the monthly rent on a comparable property. But the keyword here, of course, is comparable. The rent versus mortgage decision must consider the city, location, and other factors that could impact your monthly budget.
If you are thinking of buying a property that is much larger, in a more desirable area, or is a newer home compared to the one you are currently renting, you may find that the monthly mortgage payment is higher than what you are paying for rent. In many areas it is common to see rental prices that are higher than the monthly mortgage payment on a similar home.
Forecasting Expenses
Though the mortgage payment may be lower than a rental payment, homeowners must factor in some additional costs they may not have experienced as renters. These can include homeowners insurance (though renters should also protect their possessions with renters insurance coverage), property taxes, and homeowners association dues, as applicable.
Property owners should also have some funds set aside for home maintenance and repairs. Eventually an appliance will need to be replaced, or something will need to be fixed on the home, with the homeowner responsible for the cost. In that moment you might miss being able to call the landlord, remember that you are investing in something you own, and seeing the return on that investment when the property value increases.
For those that would like to own their own home, but are a little wary of taking on those home maintenance responsibilities buying a condo could be a great compromise to consider. With a condo the homeowner owns their individual unit, but the building and common areas are managed by a condo association or homeowners association. Insurance coverage is generally included in the condo association fee, though an additional policy to cover the furnishings and possessions inside the unit may be warranted. An added benefit is that many condo communities have amenities such as pools, gyms, and clubhouses that are less common among single family home communities. Condos can generally be financed with most home loan programs – talk to one of our loan officers to learn more.
Keeping Monthly Expenses Consistent
It is important to remember also that your rent has the potential to increase over time. Most landlords raise the cost of rent by a few percentage points every time the lease is renewed or every few years. When purchasing a home if you choose a fixed mortgage for financing, the monthly mortgage payment (principal and interest) will not increase over the life of the loan. (The escrow portion can increase if the cost of homeowners insurance, property taxes, or other items increase in the future.)
With each mortgage payment you’re directly building equity and gaining ownership of a major asset.
Thinking Beyond Monthly Costs
If you’ve determined that the monthly mortgage payment on a home in your area would be less than you’re currently paying for rent, you might wonder whether it’s time to start looking at real estate listings. A common concern among many first-time home buyers is that while the monthly costs would be manageable, they may not have a large amount saved for a down payment and other costs of buying a home.
Thankfully, there are many home financing options with a low down payment requirement, or even no down payment needed. These can be wonderful solutions for first time homebuyers as they remove that large hurdle of saving thousands of dollars before purchasing a property.
Of course, it’s not only first-time buyers who can benefit from low money down mortgage programs. Repeat buyers who are selling a home and purchasing another may prefer a low down payment instead of using the proceeds from the home they are selling. They might choose to use those funds for other purposes or even keep the first home and use it as an income generating rental property. There are lots of options – our mortgage experts can help you weigh which is a good fit for your scenario, and which will help you reach your financial goals.
Some examples of low down payment loans include:
- Down payment as low as 3.5% & perfect credit is not required to qualify.
- VA Mortgage Up to 100% financing for eligible active duty and veterans of the US military.
If you’re still not sure what the best option is, please feel free to get in touch If you would like to learn more about mortgage options and what that might mean for your monthly expenses. Our experts are happy to guide you in selecting the best option for your circumstances and work with you on your mortgage needs.
