Many home buyers desire to ‘try out’ a neighborhood or community before deciding to purchase by renting a home first.
Still others attempt to time the real estate market by selling high and then renting until the real estate market becomes more favorable for home buyers.
While both of these scenarios have their own merit, there are important financial reasons to consider before ultimately deciding what is right for you.
The very first thing to consider is the amount of money that you will be putting out towards rent – especially if you happen to be waiting for the real estate market to change to more of a buyer’s market.
Let’s use a conservative monthly rent of $3,000 per month. Multiplying this times 12 for each month of the year equals $36,000 annually.
To put this in perspective – as real estate professionals, we negotiate fiercely in order to save our clients $36,000 on a home purchase. And, this is assuming just a single year’s rent. If the client has to rent additional years, the monthly rent increases with those passing years, consuming even more of their dollars.
For the people just trying out the neighborhood, one year may be sufficient. So, they might be safe with the $36,000 figure – assuming a suitable home is available when the lease is due to be renewed for another term.
For those would-be homebuyers waiting for favorable market conditions to return, they very well could be looking at more than 3 years of leasing. Assuming a 5% increase in monthly rent during their last two years of a 3 year lease, their total outlay for rent would be $113,500.
These are substantial dollar amounts that go a long way towards paying down a mortgage.
Then there are the home buyers who are sensitive to loan interest rates, especially when they are increasing. As rates increase, so do the costs to those borrowing to make a purchase.
Hand-in-hand with these rising costs is the fact that these buyers also now only qualify for lesser expensive homes. A few percentage points of increase could cause you to only qualify for homes at a price tag of $100,000 less than you previously could.
One thing few people talk about is comparing rising interest rates against paying monthly rent, where you get zero equity back for the tens of thousands spent annually. If matching apples-to-apples with interest rates and renting, one might considering rent 100% interest. Now that 7% alone interest rate doesn’t look so bad!
In our lengthy real estate careers, we have noticed a trend of when people begin to rent a home, it becomes very difficult to return to being a homeowner again. Often, this is because the real estate market continues to rise, effectively pricing these folks out of the market.
What about alternatives to waiting for the market to turn more favorable? One strategy is to have us negotiate a substantial credit from the seller at close of escrow, which can then be applied towards buying down the loan interest rate. This could reduce the interest rate – and your monthly payments – substantially.
Another strategy could be to simply remember that although this could be your ‘forever’ home – it probably will not be your ‘forever’ mortgage. It is extremely rare that a borrower keeps the same mortgage for 30 years. The nation’s average time a mortgage is held is roughly 10 years. When interest rates come down, the borrower refinances into a lower rate, affording them a lower payment. Do know that none of us have a crystal ball, so we’re never sure when loan interest rates will come down enough to make dollar sense in refinancing.
If you care to have a chat about options for your personal scenario, reach out to us by phone or text at 760-798-9024 or email us at firstname.lastname@example.org.
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