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Continue Renting or Buy?

I am in my early to mid-twenties with a stable carreer making ~$65k-$70k a year.  For the past ~3 years I've spent $500 to $800 dollars a month in rent.  I have about $10,000 dollars in savings and am currently saving between $10,000 and $15,000 a year.  Homes in my area that I would be interested in buying generally run from $200k to $300k.  I have very good credit (720) and my only source of debt is student loans (payments run a couple hundred a month.

My question is this:  Is it worth it for me to continue renting and saving (but gaining no equity) or should I look at buying a house?  I'm thinking that if I pay PMI it might still be worth it because at least I won't be throwing 100% of my living expenses away each month.  Should I put down as much as I have?  The minimum 3%?  Should I borrow against my 401k to make the 20% down payment? 

I know I need to talk to a local professional, I'm just looking for a bit of advice to get started.

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June 15 2012 - Conshohocken
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Answers (21)

With prices as low as they are and if you plan to stay in your area for more than three years, than I say go for it. You don't need to buy a huge house, but buy something that will suit your needs. Renting long term if you plan to stay in an area for a while is not the best choice. Talk to your local realtor and he or she will give you more advice about your market.
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July 30 2012

The way I see it is if you are ready and able to buy now is the time to do it.

If you are paying rent your are paying someone elses mortgage when you are able to pay your own and reep the rewards.

Best of Luck to You!

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July 17 2012
First of all, most real estate markets are at a very low point in values.

Secondly, we may not see interest rates this low again in our lifetimes.  This means you can buy more house for your money.

Not only does home ownership allow for potential tax-free, appreciation, but it is also a nice tax deduction (interest expense).

Lastly, I would vote for the minimum down loan.  Keep your money in the 401k.

Good luck!
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July 17 2012
Buy an investment property (i.e duplex or fourplex) and rent out the other unit(s). You would have your greatest leveraging point and it falls in line with all the other people are telling you to do. If you don't have the need or want to manage it, just hire a competent Realtor to handle it for you.

Best Regards,
LeRoy Nellis II
AustinsRealtor.com
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July 17 2012

So if you purchased a home at $250k at 3% you would be looking at a principal and interest payment of $1054.00 Add in the usual taxes and tags(insurance, HOA, maintenance) and you are officially a homeowner.  It sounds as though you plan to stay in that community for a long time and that you have job stability.  With all of these factors it would seem that buying a home and reaping the tax benefits would be to your advantage.  You would have the option of putting down a little or a lot and also you seem to have a knack for saving money.  Your first home is always the hardest to purchase but it seems that you are off to a great start. 

You can always put down 3% and continue to save your money.  Some home owners make an additional payment each year toward interest and find that it will significantly reduce the number of years that they are making mortgage payments.  Consult your mortgage professional for more details.

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July 17 2012
Profile picture for user431294
I'm going to go against what most (all?) of the real estate professionals (agents and lenders) are saying and recommend "continue to rent".

I'm a renter and hopefully an owner in about a year to 18 months. I'm in a very similar situation to you: 25, $60K a year job (plus a wife making $40K), we've got $20K saved up plus we've got about $8K in emergency funds and $10K in stock and other investments. I'm neither a real estate professional nor a financial consultant, but I've talked to both. Real estate professionals are saying "BUY BUY BUY" while the financial consultant is saying "hold on there". I'm financially conservative so I'm inclined to agree with the finance guy. Hear me out.

If you had the 20% down payment for a house then we wouldn't be having this conversation right now. However, you only have $10K saved up. Let's assume for simplicity sake that you go for a $200,000 house. $10K is 5% of that and only 3.33% of a 300K house . Assuming $1200 a year for insurance and a 1.3% tax rate, you're going to be paying around $1300 a month for a mortgage payment ASSUMING you get the 3.489% rate that Zillow is quoting (good luck, considering you don't have 20%). Change that price to a $300,000 house and you're looking at a little under $1900. Ouch!

Consider that this payment will only be reduced by a little over $100 assuming you're paying PMI and rates will likely not be this low for years to come. That means refinancing to get a lower monthly payment will be difficult, so ask yourself if you can stomach a monthly payment that high for the next seven to ten years.

On top of that, this scenario isn't even considering closing costs, lender fees, points, moving expenses, furniture/appliances, and so on. You didn't mention if you had an emergency/reserve fund saved up, but if you don't the last thing you should be considering is buying a house, even if the market is right.

Regarding borrowing from your 401K, I wouldn't advise it. My personal mantra is "thou shalt not touch thy retirement savings unless absolutely, 100% necessary". Remember that with the 401K you are *borrowing* against it, which means you need to replenish it.

Here's what I would recommend:

1.) If you're making $65-75K a year, you should really try to save up more money towards the down payment. See if you can bump the amount that you put into the house fund by 25%. Even a small increase would be better than nothing; tighten the belt a little and throw as much as you can into that fund. Also, ask yourself if you really need a $300K house. You didn't mention a wife/husband; if it's just yourself then a $300K house might be a bit overkill.

2.) If you have 10K in savings total, you really shouldn't even be considering using it towards a house. You need an emergency fund of at LEAST $5,000, preferably at least $10K, and most preferably something that will sustain your food, shelter and bills for six months. After all, you can not pay for a replacement car, medical treatment, or what have you with parts of a house that you just sunk that 10K into. Likewise, if you unexpectedly lose your job, you'd really be in trouble.

3.) Speaking of job, you mentioned your 401K. If your employer is doing matching, contribute up to the percentage of your paycheck that they match. If you're doing anything extra beyond that, scale that back so that you're equal with your employer. Use that extra money to contribute to your house fund.

4.) While yes you can buy a house by putting as little as 3.5% down, there are many, many reasons why you should try to put 20% down, including: no PMI (this is huge), lower monthly payment, instant equity, leverage with lenders as you've got skin in the game, etc. etc.

5.) You've got to consider closing costs and other fees as well. These are not small numbers you can ignore: expect to pay anywhere between $3K to $6K for closing costs and at least $1K for miscellaneous fees. I'm planning on using some of our investments towards these costs but even that is risky, considering that stock is volatile.

In conclusion, I recommend waiting and building up a better financial base to go off of before making a move. Your rent is low, and while real estate people will say that you're "throwing money away", you would be spending WAY more money for interest, principal, taxes, insurance, and PMI; given your current rate of saving that is going to hurt you a lot. You've got a well-paying job and you've got fairly low debt commitments, but it would be (in my eyes) foolish to get yourself into a 30-year debt that is double or triple of what you're paying for rent right now. And that's not even considering maintenance costs!!
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July 14 2012
In most cases if you are living in an area for several years it is almost always better to buy than rent. When you rent, you're not building equity and the money cannot be recouped. When you get a fixed mortgage, you're payments will stay the same for the duration of your loan. Oftentimes, rent will go up over the years. Since home values have dropped and are slightly starting to rise, now is a great time to buy a home. 
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July 13 2012
renting is paying for a place to live - buying is building equity, having a place to live and getting the tax benefits.  If you have a down payment you should buy.
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July 11 2012
Asking us that question is like asking a friend if you should marry your girlfried.  Only you can answer that question.  I am going to play devil's advocate for a moment, you do not say that you are married, and given the amount of money you have been saving, I gather you are not, what about if you get married and your girlfriend owns a home....you do not say how mobile your career is, how about if you either change jobs as you move upward or move to another state?  Whereas owning real estate is a good idea, once you make the investment you will not as liquid as you are now.  This early in life, I would maybe purchase a property that I could rent later on or that it will be easy to sell as your needs change.  The way you are conducting your life, is very refreshing, the best of luck and God bless you! 
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July 10 2012
Profile picture for SteadyState
The last person you want to talk to is a local professional Realtor (R). Why? Because you need to run the numbers more carefully before approaching any professional.
In your case based on simply plugging your wost case numbers (max rent = $800, best home price = $200K, interest rate of 5%, down payment 10% ), you will spend roughly $2K per month for owning your home. This is more than 2X your rental costs and approaching 3X your rental costs. Moreover, even after paying 2.5X your rent, you break even on your home purchase after 22 years.

A little too much risk without a corresponding reward. Perform a more careful analysis, find out what the market in your area is really like, learn about the cost and benefits of home ownership, etc. - only then talk to a professional.
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July 10 2012
BUY! Most markets have a plethora of homes from which to choose, and rates are historically low. Your credit is great and a good lender will help you find the mortgage program that best suits your needs.
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July 10 2012

Owning a home is a great way to build your future but everyone has a different situation that they are working within. Based upon you current situation and income I believe that you are probably in a great position and the benefits outweigh the downfalls. The interest rates are very low right now in part due to it being a election year and pricing is still rather reasonable in almost all areas. Keep in mind that the market is recovering in many areas very quickly and the window of opportunity is closing rather quickly. 

In addition,with your stated income above, your ability to reduce your yearly tax burden should be a major focus at this point. After all you, by purchasing a home, would be able to write the interest that you pay on your loan against your taxable income. You probably do not have very many write offs at this point and probably take just standard deductions now. The loan that you will get to purchase your home will be mostly interest for the first 5 yrs. If you are paying $1000.00 a month in payment and that is almost all interest you did not just purchase a home but you also just bought a $11000.00 a year tax write off against your income. As you might know, it is not what you make in this world but what you can keep from being taxed on and this will in theory reduce your taxable income from 65k to 54K. This is a huge jump for you.  

You also asked about loans. There is a 3.5% fha program out there that can be very tempting but i does in fact have a rather high mi tied to it. I personally would not recommend tapping your 401k to put down 20%. I am a believer in the more you have invested in different areas the better and it is all about being able to make money in lots of different venues if you can. I would say that instead of fha that you do put a slightly higher down payment on your home and go with a conventional 5%-10% down program. Budget and save this money yourself is my thought as you pretty much have the money saved already. This would have a lower mi at this point and would make the best usage of your money and payment.

Please also remember that this from what I reading is your first home. You will not live in this home forever and need to consider this when purchasing. This is a needs home; meaning a home that meets your needs right now and for the next five years. In five years or less, the market will be vastly different and you will be ready to up grade and buy your next home. You will do this with the equity that you have earned on the home you purchase today, and the tax savings that you have earned instead of the money that you have to save from you salary.

Best of luck to you...happy home hunting!!  
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July 07 2012
Buying a home is a great investment and will normally be a good place to put your money. I would say buy your house! And continue to save your money.
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June 26 2012
Profile picture for the_country_hick
No one here can tell you what is your best option. Your future plans can change a good housing plan into a bad one. You have to be willing and able to own the same house for at least 7 to 10 years for it to make sense buying. Selling costs and mortgage amortization create that length of time.

If you are secure in your job and are sure you will remain in that area for at least 7 years consider the links below.

"How to determine what you can safely afford to pay towards your monthly mortgage payment. Lenders may give a different number. "

"Does it make more sense to buy, or to rent? Here is the way to find out for sure."

"Why rent if you could buy for less money? Valid reasons inside."

"Do low interest rates really make it a good time to buy a house?"

"Its your first home and you are looking for something but are not sure where to start to look or about loans."

"I want to buy a house. It will be at least one year before I am ready to buy. What should I do now to prepare myself?"

"Questions I would ask when purchasing any property."

"What should I watch out for when choosing a home to buy so that I don't jump into a money pit?"

Hopefully after reading the links above and doing a lot more research you will make the best choice for you. If it is buying or renting does not matter. Making the right choice for your individual circumstances is what matters.

Make sure that if you buy a house today you buy it thinking about tomorrow. That means if you are thinking about getting married and having kids buy the house that makes sense for that future need. That would be a 3 bedroom with lost of room. You should also consider old age when buying. Try to picture getting into and around any house you look at when stuck in a wheelchair or using a cane or walker. If you buy a house now that can support those possible future needs you may eliminate a reason to have to move in the future.

I mentioned the above because my grandmother is now having problems getting in and around the house she has had for many decades. It is also possible that even a young and healthy person could break a leg. A broken leg and an upstairs bedroom is not a polite combination. This is something to consider for a long term house.

With selling costs taking about 10% of the selling price from you moving up to a better house is really expensive. Buy right the first time so you do not need to move again. Do not forget that house prices could easily drop more. If buying is not at least as cheap as renting renting may be the better option.
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June 15 2012
Profile picture for dacolan
You can't build equity as house values are falling. Montgomery County is down -3.6% Y-o-Y, and has been falling steadily at about that same pace for the past five years according to the Zillow Home Value Index. Ask yourself what will happen to RE values when the current artificially low interest rates rise and buying power is severely diminished.

The myth perpetuated by RE pros that "renting is a losing proposition" is patently false. When factoring in insurance, taxes, maintenance, repairs, etc., there are many situations and markets where people are much better off financially by renting.

Rather than taking my word or that of a commissioned RE pro, protect your personal financial well being and do your own due diligence. There is a very good rent vs buy calculator here on the NY Times web site.

Based on the numbers you've provided here, I think you'll find the answer is quite clear.
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June 15 2012
Hello to you,

I would advise you to look very seriously into to buying a home. You are in a great situation regarding the fact that the interest rates are the best that they have ever been, you make a nice salary, and your FICO scores are outstanding. All these things being in your favor create a great opportunity to be a first time home buyer.

It would be a great benefit to you to talk with a real estate professional, and then a lender to find out for sure what would be the best plan to follow, for you to ultimately have a great home buying experience. Finding the right agent is key, they must have your best interest at heart.
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June 15 2012
I would definitely look further into buying a home. Gaining the equity is just one of the many benefits of home ownership that far outweigh renting. How much you put down is simply a personal preference. Some people say to put as much down as possible, while others prefer to not drain their savings. If you put down less than 20% you can pay all your PMI up front at closing, I would ask some lenders about that option. Lastly, be ready for some maintenance! That is typically the biggest effect first time buyers experience after moving in. So I would also add a random maintenance category to the budget when you are deciding how much you are comfortable with spending. Best of luck!
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June 15 2012
Renting is a loosing proposition.  The question is do you want to deal with ownership?
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June 15 2012
Purchasing a home is always better than renting in the long term.  If you can buy a home, outgrow it, and keep it for a rental, purchase a larger home in the future, I would get into the real estate market right now.  Interest rates are unbelievably low, and there are some bargains.  I would advise you to speak with a mortgage rep ASAP to set some short and long term financing goals.  Good job on the excellent credit!  The Jeff Menday Team.
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June 15 2012
Dear 982015, 

It's the best time in history to buy a house and no one knows how long it will stay that way. Interest rates are already threatening to creep upward. You should go ahead and get while the getting is good, most especially If you plan to stay put for 5 years or so. Even if your roots are less permanent, some of the buying opportunities out there are lucrative, even in Conshy, where you are now. How much to put down depends on your lifestyle. If you want to have liquidity for dining out, clubbing, travel, etc. then an FHA loan will allow you to put the minimum down and still have some cash left over, even with PMI. If you're more of a homebody and are okay with being a little bit "house poor", then you can afford to put down more up front in order to build equity from the start. Either way, your next steps are to talk to both a professional Realtor and a mortgage lender. Most Realtors have relationships with mortgage lenders; this relationship is crucial to a stress-free transaction.So,  I recommend first finding a Realtor you like and trust and asking him/her for a referral to a great lender. Best of luck!
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June 15 2012
Why don't you start by looking at what $200-$300,000 can buy you and then talk with a few lenders to see how much would your monthly mortgage payments, insurance and taxes be.  If it works better to put down 20% then wait and save enough for the downpayment and closing costs.  The only person who can decide what to do is you.  Be well informed before you make a decision, would be my second advice, and you are doing just that.  The best of luck!!!
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June 15 2012
 
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