Before you burn that tax refund on shopping sprees, ‘red bottoms,’ or a lavish vacation, now is the best time to consider whether or not you should use those funds towards home ownership, or continue to pay rent in your cozy apartment.
Becoming a home owner is still considered to be part of the “American Dream”. However, just like anything else, there are deﬁnitely pros and cons. It all depends on the individual – your lifestyle, career, family, etc.
Purchasing a home is both the biggest ﬁnancial decision and reward one can make because home ownership builds equity. Think you’re in the market to purchase a home? Here are some pointers that will assist you in making this critical decision.
Advantages of Renting
- More ﬁxed costs for term of the lease. However, you do run the risk of an increase rental rate. This normally happens when there is more demand than there is supply. Your landlord will expect you to pay the going “market rate” if you’d like to renew your lease agreement.
- Not gaining equity, but not losing any either.
- Short-term commitment. When your lease is up, you’re free to move.
- Little to no maintenance. If the AC goes out (God forbid you’re in Texas), your landlord is the responsible party (per your lease agreement).
- Smaller upfront deposit/down payment. Depending on your type of ﬁnancing, unless you’re a veteran, you may be required to put a percentage down.
- No minimum required credit score.
Advantages of Buying
- As your Mortgage balance decrease, your equity will increase. A rule of thumb is to live in a property for at least 5-7 years.
- Creative control to remodel and personalize your home to match your needs and style. If you’re a lover of pink paint, by all means, paint away. You may have trouble selling it, but you deﬁnitely won’t get any ﬂack from your landlord.
- Tax. You can deduct mortgage interest as well as your property taxes. Unfortunately, renters don’t receive this bonus. Your landlord receives all of the available tax breaks. Additionally, if you meet certain requirements the IRS won’t apply a “capital gains” tax on your proﬁts from the sale of your home. You can keep the ﬁrst $250,000 in proﬁt you make when selling the home if you’re single, or the ﬁrst $500,000 if married. Also, if you run a home-based business you may be eligible to take deductions for your home oﬃce and portions of utilities.
So, you see? Being a home owner deﬁnitely has its perks, but then again, so does renting. Most people are afraid to swim the home owner’s water due to ﬁnancial or credit limitations. This shouldn’t deter you. A great mortgage professional will assess your credit and income. If they ﬁnd restrictions, they will be able to guide you by advising what on your credit will need to be addressed.
Side note: Did you know you are entitled to a FREE credit report once a year? Pulling your credit report will be a great start to knowing if you’re ready to purchase a home. Your credit score is made of 3 scores, your middle score is known as your FICO score. This is the score lenders use to determine financial credibility. When you pull your scores, here’s a suggestion: Pull from a reputable site such as the 3 credit reporting agencies – Equifax, Transunion, Experian; this will be where your most accurate data will be.
Caution: Be SURE to speak with a lender prior to going to these “credit repair” agencies which “dispute” derogatory items. Lenders will REQUIRE you to contact the credit bureau to remove the dispute from the item, before granting an approval. I’d hate to see waste your hard earned money that should be going towards your pink paint.