A big question posed by many Americans, whether living in San Francisco, Chicago, or the north woods of WI, is: Should I rent or should I buy? This question is not uncommon for people to ask of all income brackets.
Though rental property options in our area of Hayward, Cable and southern Bayfield Counties are fewer than opportunities in most urban areas, this remains a legitimate question. Every now and then this inquiry comes our way at McKinney Realty as people walk through our door.
With a little research, I was able to get some answers that really make sense, so I’d like to share them with you.
If you meet the following three criteria, perhaps now is the time to buy a property.
Can you find a home of choice spending less than 30 per cent of your gross income on housing expenses? Lenders typically use two debt-to-income formulas to help you determine this.
The first formula looks at your housing expenses. Lenders have determined that 28 percent of your gross monthly income should cover your monthly mortgage payment (principal and interest), homeowners insurance, and property taxes.
“The second formula considers your total debt obligations: mortgage payments, student loans, credit card bills, car loans and other obligations. Earlier this year, the Consumer Financial Protection Bureau adopted a new “ability to repay“ rule for lenders to use that sets the total debt-to-income ratio at 43 percent,” according to Sharon Epperson, Personal Finance Correspondent for CNBC.
If these formulas rule in your favor, you may be ready to buy.
Since it can take up to 5 years to recover closing costs associated with a new home purchase, ask yourself if staying committed to your current job for about 5 years is in the picture. If you don’t feel the need to be flexible to move for a better paying job, buying a new home may the better option.
Though your primary housing expenses (your mortgage, real estate taxes, and homeowners insurance) may be greater than your current rent, be aware that you can calculate the “after-tax” mortgage payment for a more accurate comparison to the rent you are now paying.
If you itemize your federal return, your mortgage interest and your property taxes are tax deductable. But, if you have to pay the Alternative Minimum Tax (AMT), you can’t take itemized deductions for real estate taxes. The rules for deducting mortgage interest are more restrictive for AMT than for regular tax.
In a nut shell, if you are sure you’ll be staying in the neighborhood, and that the monthly payments on the home your heart is set on will be less than your rent or 30 percent of your monthly (pre-tax) income, then make an offer on that new home!
Adapted from an article by Sharon Epperson, Personal Finance Correspondent for CNBC.
Photo by Stuart Miles with www.freedigitalphotos.net