Buying a house is the largest investment most people ever make, and it’s not a decision you should to enter into lightly, say personal finance experts at the Virginia Society of Certified Public Accountants (VSCPA). If you’re considering making the leap from renter to owner, there are some things you should consider.
Who (and where) you are
A 2016 study from the National Association of Realtors found that more than one-third of all homebuyers are 35 and younger. While people five or 10 years older might still be recovering from the housing crash, millennials seem ready to start that new chapter. And this group might be onto something: In 70 percent of the major markets across the nation, buying beats renting in less than two years. A Zillow analysis of rent-versus-purchase costs found that it takes an average of 1.9 years to break even on a home purchase. In larger cities, you would need to live in a home for three years or more to break even on comparable rent, but that number drops to 1.5 years or less in Cleveland, San Antonio, Kansas City, Houston, Atlanta, Detroit and Indianapolis.
When you want to buy and how long you want to stay
According to a study from Black Knight Financial Services, the time to act is now. The report, which analyzed national price appreciation and household income, says that in 2018, home affordability pushes the upper limit of the pre-bubble average, whereas today, 21 percent of median income is required to purchase a median-priced home with a 30-year fixed-rate mortgage. Considering the current rate of home price appreciation, combined with a .5 percent annual increase in mortgage interest rates, the near-term forecast is not so optimistic. If home prices and interest rates continue to rise at the same pace, nationally, the average monthly payment on the median home will rise by $114 within 12 months and would be $240 more per month in 24 months.
How long you want to stay
House prices fluctuate year to year. And you're leveraged when you buy, so a price drop of just 5 percent could mean a huge loss if you have to sell. However, if you own for five or more years, that's much less of a risk. Home prices are more likely to move at least a bit higher over longer periods of time. And you'll have built up more equity in your home by paying down the mortgage over five years, and that will cushion you against a drop in prices.
How much you can afford
CPAs say not to spend more than 28 percent of your gross pretax income on your monthly housing payment. Or, another rule of thumb is that your combined debt (housing expenses, credit cards, student loans, alimony, car loans, etc.) should be between 30 percent and 40 percent of your pretax income.
What rent will cost you in 2017
Renters aren’t immune from price increases. If you live in a popular neighborhood with no rent control, your rent is most likely to rise over time. A fixed-rate mortgage won't (plus, you don’t build equity when you rent). There also aren’t any tax write offs available to renters. The IRS says your landlord deserves those honors.
When you sit down and crunch the numbers, does it make more financial sense to buy or rent? There are many free calculators online to help you create and analyze different financial scenarios. If now isn’t the right time, you can continue to save for a down payment until you’re ready.
A CPA can help
As a trusted, independent financial advisor, a CPA can understand different options available to you. To find a CPA in your area, or to learn more about the services CPAs can offer you, visit vscpa.com/FindaCPA.