Being a homeowner means something different for each person. For me, it represents avocado trees, fresh basil in the garden, ripe plums for the picking, a large porch, a doggy door for Roxy to feel freedom :) as well as achieving a long time goal, and a new sense of community and personal investment in myself and my future. (For my dog, Roxy, it represents a large backyard to patrol and frolic in!)
To be a homeowner is a dream for many Bay Area dwellers. While it seems unattainable at times, residents are quickly recognizing that the cost to rent is currently on par with the cost of a monthly mortgage. One of the best parts about my career is helping my clients make their homeowner dreams a reality! I find that many first time home buyers have to go through a mental process of “demystifying” homeownership and what is truly possible!
There are many different factors to assessing if it is the right time for you to buy a home. I recently joined the “homeowner’s club”, and I can honestly speak to the challenges and successes of making the leap from renter to buyer. I believe in having an honest, realistic approach to real estate; the first step is in examining your budget, which can be an intimidating one. When making this first step, I always recommend that my clients speak with a trusted expert in the field.
I recently connected with John Glynn, an expert with Lasalle Mortgage Services, to gain his insight on making this important decision.
Understanding the Costs
“One of the key steps in making the transition from renting to owning real estate is gaining a good understanding of the costs in either scenario. Rental payments are pretty easy to figure out; there’s rent, and maybe there’s insurance. Over time, the costs might be subject to increases. But in an ownership scenario, the composition of a monthly housing payment is entirely different. You’ll have a loan payment, homeowners insurance, real estate taxes, and maybe mortgage insurance. In most cases, the total payment will remain steady until the loan is paid in full.
Trying to compare the total of all items in the ownership model to the cost of rent can be misleading, so it helps to try and translate the housing payment into terms that are similar to rent. We can do this by performing a rent vs. own analysis, which relies on a few assumptions around the variables involved.
A portion of your loan payment goes toward paying off the balance - that’s effectively a form of savings that doesn’t happen within a rental payment. Mortgage interest and property taxes are usually tax deductible. Real estate has value as an asset that is subject to change.”
A Few Questions to Ask Yourself…
To go through this exploration, start with a few basic questions:
- What is the current cost of rent for the home you want to live in, and how might it change over time?
- How much would it cost to buy the same home?
- How much are you putting down, and if you remain renting, what would you be doing with that money?
We can add some dimension to the analysis by exploring other elements.
- The landlord pays for maintenance costs now, what should I expect to spend on repairs if I become the owner?
- What happens if real estate returns are zero over the next few years?
- What rate of appreciation do you expect to experience?
“The result of this exercise is that you can get a sense of what level of home purchase leads to a monthly payment similar to what you’d pay for rent, all things considered. At the end of the day, translating the two options into similar terms will help familiarize you with what owning will feel like in terms of budgeting. The more effectively you do this, the less buying a home feels like a leap into the unknown.”
If you would like to talk more with me about the challenges and positive elements of home ownership, please contact me! You can play around with some of the variables involved in Rent vs. Own math with this calculator. You can also contact John (see his information below) to better understand the analysis of renting versus owning.
John C. Glynn, CMPS
Real Estate Finance | LaSalle Mortgage Services
6201 Antioch St., Suite 200 Oakland, CA 94611