Dear Kathe:
My wife and I are new doctors and ready to get our own place. We were thinking about renting for a while – how long should we rent for before buying a home?
The rent versus buy decision most often comes down to how much money you have saved. If you have a lucrative job, qualifying for a mortgage at today’s low interest rates is rarely the issue. But coming up with a down payment might be.
If you make $200,000 per year, at current interest rates, and assuming you are not carrying any debt, you could qualify to buy a home for approximately $850,000. That is probably much higher than you imagined. The monthly payment would be approximately $3500/month (principal & interest) with 10% down. But you might find the 10% (or $85,000) down to be the stumbling block and feel renting is your only option.
Renting a nice apartment or small home/townhome would typically cost you $1800 – $2000 each month. That adds up fast – not only don’t you get the opportunity to deduct the mortgage interest that you pay on your tax return each year (thereby lowering the amount of taxes that you owe) but rental payments are all cash lost to you – you are not building any equity that you can recoup someday when you buy. And if you are willing to spend this much each month on rent, you could pay the same amount each month for a mortgage on a $450,000 home if you have the 10% down (which is a much lower $45,000)!
Lenders do typically require 10% down however, unless you use a specialty product like an FHA loan. So if you have no savings, the chances are that unless you can get a “gift” from a family member or incredibly generous friend, you will need to rent until you can amass some savings. However, it is a wise decision to get into homeownership as soon as you can. Even if you buy significantly below what your income qualifies you to buy, just getting in the housing game will save you tax dollars and help you build equity for another home in the future when your savings more closely matches your income. Why pay rent for your landlord to increase his equity in the home you are renting.? With low interest rates, now is the ideal time to explore exactly what it will take to get you in a home of your own!