Should I rent or should I buy? Mortgage versus rent? Let's talk about it!
Hi there! My name is Emily Farber, and I'm a Realtor® with Lepic-Kroeger, Realtors® in
Iowa City, Iowa. Thanks for joining me today. I create video content all about
real estate and the greater Iowa City area. Hey, did you know I have a handy
buyer's guide that is full of information that will be quite helpful
if you are looking at making a home purchase? You can download it for free.
I'll leave the link for that in the description box right below this video.
If you don't know how to find that, all you need to do is tap on the title
underneath this video and that description box will open right up. Hey,
we all know that owning a home is part of that mythical American Dream that so
many people strive for. After all, it is a huge goal, but renting forever is an
option and it's an option that works for some people. However, if you are
interested in owning your own home there are some questions that you should
answer for yourself to determine if now is the right time. First off, for most
people purchasing a home means financing a significant portion of that purchase
price. You're gonna have to be able to qualify for the mortgage, right? Well, in
order to do that you will have to speak to a mortgage lender, and I always, always
recommend talking to a local mortgage lender professional. That person is going
to be able to not only give you your credit score, which by the way, may be
different than what those online resources are telling you, he or she is
also going to be able to tell you what interest rate they would be willing to
extend to you for that mortgage as well as the budget in which you are going to
be working. Now, not all mortgage lenders are the
same and if you would like to talk to me about some really great local
professionals I'd be happy to share my list with you.
Next up in your financial decision-making is your nest egg. Yes, in
an ideal world people would have 20% down,
but that doesn't often happen. I help buyers make home purchases in a variety
of financial situations. I help people who are making a cash purchase for the
entire purchase price, all the way up to people who are looking at homes with
needing 100% financing to make it happen. No matter if you are a cash buyer or a
100% financed buyer I do think it is important for you to have at least saved
up enough money for your closing costs. Yes, sometimes you can get a seller to
contribute towards buyer closing costs, but there is no guarantee in that, and
there are a lot of variables, so in order for you to be more comfortable in
moving forward in the purchase I think it's a great idea for you to have a few
thousand dollars saved up in order to pay for your buyer closing costs.
Another huge question you absolutely must answer for yourself is how long do
you plan to stay in the area? Are you committed to the job or the community? If
you are not, and you think there's a fairly good possibility that you might
be moving in the next two years or so, homeownership may not be the best option
for you. There's nothing wrong with renting if you think that you're going
to be moving on down the road in a short period of time. If you do plan to put
down roots and stick around in the area for at least three years you may want to
consider owning rather than renting. Now the information I'm about to present is
specific to the greater Iowa City area because we are going to be building off
of the assumption that the average rate of appreciation for real estate
residential properties is about 2-4% a year, so if you're
watching this video and you're thinking about purchasing in a different area, you
will need to contact a local real estate agent and find out what that area's
average rate of appreciation is. Now let's do just a little bit of math so
that I can show you, through the numbers, why three years is that threshold for
when you could be looking at making a home purchase and still having a profit
when it comes time to sell if you're only going to stay there for three years.
If your current rent is between $1200 and $1400 a month, and you wanted your
mortgage to be in that same zone, with our current low interest rates, very
little money down, and decent credit, taking into account your monthly
mortgage, taxes, and insurance, here in the greater Iowa City area, you could likely
purchase a home priced between $200,000-$225,000. Okay, so let's say
you bought a house for $225,000 and in
three years you've decided to take a new job and you're going to leave the area.
At 3% appreciation, assuming you've done a decent job of keeping the
house up, you could be expecting to sell the house at about $246,000.
But, let's say you've done a few more things to make it
even snazzier, such as fresh paint and some new appliances.
So, let's round your new selling price up to $250,000. You
hire a great real estate agent to help you get it sold and before long you've
got an offer. If the offer price is $250,000 and you
subtract your purchase price of $225,000
you're looking at a $25,000 profit. The brokerage fees in this
particular case would be $15,000 to sell your house.
Now keep in mind, there is no standard brokerage fee. They can vary.
That means you'd be looking at about $10,000 net. Now, there still are some
more fees that are involved with selling your house so you need to leave a
cushion for expenses like property tax proration, a few legal fees, and any money
you would need to spend to address remedy issues. As you can see, three years
is about the minimum amount of time that you would need to live in the house in
order to sell it and make a small profit. Now let's be real. No seller wants to
come to the closing table and have to pay money in order to sell their house!
Sometimes things are beyond our control. So let's look at it from another
perspective. If you had been paying landlord $1,200 a month and you'd been
living in that townhome for three years you would have paid that landlord
$36,000 for the privilege of paying down that landlord's mortgage. That is a
sobering thought. So, even if you do end up purchasing a house and you end up
leaving before your goal of a minimum of three years, there's always more than one
way to look at it. At least you're not out that much money. Some other things to
consider when you're debating rent versus mortgage have to do with your
financial preparedness. Beyond having closing costs and maybe some down
payment saved up, you're going to need to have money for your emergency fund. Your
what? Yes, one of the not-so-great benefits of homeownership is that those
unexpected financial surprises having to do with repairs and replacements become
your problem and not your landlord's problem. So, sometimes with homeownership
you have time to save up in order to pay for something, for instance you want to
replace that ugly flooring or you know the roof is nearing the end of its life
expectancy and you're starting to budget for a new roof. Sometimes you'll have
expenses that come out of the blue like your refrigerator or your water heater
just craps out and you have to buy a new one.
In those cases you really need to have a few thousand dollars squirreled away into
an emergency fund so that when you have to buy those things it doesn't come as
such a hit. Depending upon how financially conservative you are you may
even want more money. Some people are really only comfortable when they have
an emergency fund that is capable of paying for all household expenses for
three to six months. That includes things like emergency repairs, mortgage, and
utility payments, because if you were to lose your job then you would have to tap
into that large emergency fund. Another thing to consider
is the type of house that your budget will allow you. If your lender has given
you a range and that range will only buy you a small one-bedroom condo, but you're
in a relationship and you're thinking about having children soon, you are not
going to want to stay in that one-bedroom condo for long. You're simply
going to outgrow it. When you're making a home purchase ideally that home should
be able to suit your needs for the next several years, the next stage in life, so
chances are you'll want a home with a few bedrooms so there's room to grow.
Hey, thanks for joining me on today's video. I hope you found it to be useful as you
debate, "Should I rent or should I buy?" Don't forget about that free buyer's
guide! I'll leave the link for it in the description box. I'd love to chat with
you if you are thinking about buying. You can find all of my contact
information down in that description box. Gimme a call, gimme a text, give me an email, and I
will be sure to reach out to you. One other thing, if you are in the Youtube
mood and you like these videos, check out my playlist right here. This is my
buyer playlist and it is full of great videos to help you learn more all about
the real estate buying process. Hey, it's been fun! Thanks for joining me, and I'll
catch you later!