Owning a home isn’t a new idea and has historically been associated with financial stability, but with the recent recession that has spanned across multiple countries buying a home has gotten a bad rap. One reason home ownership is still a good investment is that interest rates on mortgages have hovered around the lowest historical average these past few years. Low interest rates on home loans means owning a home can be much more affordable than renting – even in the short term.
For some factual data, home ownership worldwide is quite high. For instance, in Europe, many countries have a higher percentage of home owners than renters. Examples include Bulgaria’s home ownership rate of 97%, followed by 92% in Hungary, (then jumping around a bit) 78% in Italy and Spain, 69% own homes in the UK and Australia. The US comes in at 67% of people who own their own homes.
What’s interesting about purchasing homes in European countries is that interest rates on mortgages can be as low as 4.5%, similar to Australia where rates are hovering around 5%, which might account for the higher ownership rates.
As a self-proclaimed number cruncher and chart-lover, I like to use rent vs. buy maps and charts to see if renting or buying is a better option in varied US metros. According to Trulia’s Trends Summer 2012, buying is cheaper in every major metro, even New York City and San Francisco, if you can snag an interest rate under 5.5%. How much cheaper? Even at a 5.5% mortgage rate, buying is 10% cheaper than renting in San Francisco and 16% cheaper in New York City (two notoriously expensive US cities to live in no matter whether you rent or buy) if you plan on staying in the area for 7 years – anything under 3 years is a toss up.
So how can you decide what’s best for you, rent or buy?
- You’re ready to grow roots. Well, maybe not literally, but you’re willing to live in the same place (or stay put) for 5+ years.
- You’ve saved a substantial amount of your income. So maybe you haven’t saved exactly 20% down towards a home loan, but you’ve saved enough to put something down (10% or more is a good start), cover closing costs, and have a bit left over for repairs.
- Your credit score is pretty darned good. Good as in 720+ across all three credit bureaus. The higher your credit score, the more likely you’ll qualify for a low-interest home loan.
- Your income is stable. At some point in an adult’s life, a person stops bouncing around crummy, low-paying jobs and settles into a career. As each person is on a different path, that settling into one’s own “groove” or career may happen at different points in time. When it does happen, it may be a sign that it’s time to buy a house – a commitment that requires stability.
Of course, these are just general guidelines to help you weigh the pros and cons of home ownership. Once you’ve made the decision to buy, the next step is getting pre-approved for a home loan and searching for a place.
- Get pre-approved for a home loan. You can compare home loans on a number of websites as a good starting point; a good example of such site is iSelect in Australia. However, before shopping around town for homes, get pre-approved for a loan (NOT pre-qualified – these two things are different.) This will give you a ballpark figure for homes you can afford based on your income, credit score, and debt.
- Shop for homes you can afford. Maybe you can’t afford your dream home right now, but buying a “starter” home might be a good jumping off point.
- Hire an agent. Not everyone will agree with this tip, but for first-time home buyers, hiring a real-estate agent will help you through the paperwork and answer your questions.
- Don’t forget about the inspector. If you find a home you love and can afford, make an offer – your agent will help place the bid which should be a little lower than what homes are selling for in the area -, then hire an inspector. You don’t want to find out after the fact that the foundation needs to be replaced!
With home loan rates so low, monthly payments are close to what rent costs in many cities, or less. Now might be the time to buy a home.
Are you looking into buying a home this year?