A. Reasons to Rent
B. Reasons to Buy
C. Frequently Asked Questions
D. Bottom Line



A. REASONS TO RENT

(1) Short term time and expense of buying and selling. Because of closing costs and the potential time involved in selling a property, it is often more advantageous to rent if you know you will be in a home a very short time (less than two years or so), and if you know you will have no future relocation assistance from your employer.

(2) Maintenance and upkeep. There are costs associated with maintaining a home. These costs can often be amortized over a long period of time. A roof, for example, while costly, will often last 20 years or more. In the short run, however, these can be expensive. When you rent, there are maintenance costs but these are typically paid by the landlord (and included in the monthly rent).

(3) Inability to get a mortgage. Despite your desire, you may not be able to qualify for the mortgage amount you need or want, or you may not have the required down payment. However, lending qualifications have become more liberal, and the current low mortgage rates allow many buyers to qualify for more than they think. Before you make the decision to rent vs. buy, ask me to put you in touch with a reputable lender who can tell you how much of a mortgage (or monthly payment) you actually qualify for. It may surprise you!


B. REASONS TO BUY

(1) Equity build-up. Part of your monthly mortgage payment goes toward loan (principal) reduction. Over a period of time, you are paying off debt and building equity (ownership value) in the property. In many instances, the value of the equity in a person's home is their single largest asset!

(2) Appreciation. The value of a home tends to increase over time (sometimes dramatically). In addition to the equity build-up indicated above, there is often a substantial increase in value that increases homeowner's equity in their homes. When you rent, this appreciation goes towards the landlord.

(3) Tax advantages. Federal tax codes (and many state codes) allow a deduction for mortgage interest and real estate taxes paid on a primary residence (as well as your loan origination fees). This can be very substantial, and is realized on an annual basis. Your accountant can provide all the details, but here is a brief example:

Assumptions: A purchaser in the 28% tax bracket purchases a home for $180,000 with 5% down ($9000) and gets a 30-year mortgage for $171,000 at 6% interest. Annual real estate taxes for this property are $3000. Monthly condominium assessments are $250 (which include the homeowner's insurance).

The buyer's monthly mortgage payment (principal, interest, and taxes) is approximately $1275. With the assessment, the total monthly payment comes to $1525. On an annual basis, the total mortgage interest and taxes paid would come to a total tax deduction of $13, 202. Multiplied by 28%, this yields a tax savings of $3,696 annually, or $308 monthly.

Put another way, the total monthly payment of $1525 minus the tax savings of $308 is equivalent to an effective payment of $1217. And this analysis does not take into account any appreciation, nor equity build-up!

Please note that the assumptions listed above will be different depending on various factors. We will be happy to work out a similar analysis based on your specific situation and current financing rates.

(4) Freedom, security, liberty, pride of ownership. All of these are certainly more abundant when you own your own home vs. rent someone else's property. Just one example is that when you lease you have the right to live in the property until the end of the lease. There is no guarantee that the lease will be renewed or, if so, at what monthly rent. With ownership, you can live in the property until you decide otherwise.


C. FREQUENTLY ASKED QUESTIONS.

a) How much are closing costs?

Closing costs will vary based on numerous factors, but for a typical resale, they will generally come to around 2% of the sales price of the property. When buying new construction, closing costs will often be higher due to how real estate taxes are handled, and in addition, due to the requirements of pre-funding your assocation's reserves with at least two months of assessments. Key components of your closing costs include the City of Chicago transfer stamps, attorney fees, and bank/lender fees.

b) When should I start looking if my lease is up in (insert month here)?

Right now! If nothing else, when locked into a long-term lease, previewing properties will enhance your understanding of available inventory and help you to learn market value. This way, when you are in a position to purchase a property, you will feel more confident having already done your homework! Buyers often spend 30-45 days searching for the right property. Following this, the typical duration between when an offer is written and when the buyer closes on the property is 45-60 days. That being said, a buyer should typically begin to actively look to purchase a home 90-120 days prior to the end of their lease.

c) How much do I need for a down payment?

Probably less than you think. Historically, buyers needed to come up with 20% of the sales price in order to purchase a property. And while it is true that putting 20% down will likely position yourself to get the best interest rates and avoid paying PMI insurance, most buyers are putting substantially less down. Most lenders can give competitive loan products and mortgage interest rates even if the buyers are putting just 3-5% down. Many of our buyers have done 100% financing without paying premium interest rates. Our point is that it is worthwhile to have the discussion with a qualified lender before assuming that you don't have enough saved to put down for a down payment. Please ask us if you would like a recommendation for a lending professional.

D. BOTTOM LINE

If you are planning on being in your new home for a short period of time and don't have relocation assistance, or if circumstances are such that you can't presently qualify for a mortgage, it makes sense to rent. In just about any other instance, it makes more sense to own your own home.

I love to work with first time homebuyers! If you are considering making your first real estate purchase and would like to have a first-time homebuyer consultation, please feel free to contact me.