This was originally published on Monday, September 5 ,2016 in the Pacific Daily News. Click here to subscribe to the PDN.
Q: I have noticed that home mortgage interest rates are at an all-time low. Currently, I am renting my home and have been giving a lot of thought into taking advantage of the low interest rates and purchasing my home. My credit score is pretty good and I know I could be approved for a rather low rate. I have never purchased a home, and I am wondering if owning a home is really for me?
A: It is true that mortgage interest rates are currently low and purchasing a home now would be a great time to take advantage of these low rates. On the other hand, owning a home is quite different than renting. Purchasing a home will be one of the largest financial decisions you will ever make. Before deciding, consider the advantages and disadvantages of homeownership.
Advantages of buying a home
- Personal wealth. Owning a home offers long-term benefits of security, equity and potential growth in your personal wealth. Over time, homeowners will build equity. Your monthly mortgage payment is divided between paying the interest on the money borrowed and the principal, the actual cost of the house. Every dollar you put on the principal is a dollar towards your ownership – your equity. You can increase your equity by renovating and upgrading your home, appliances, and updating its curb appeal. Your home can also be a source of emergency money if health or other issues arise unexpectedly.
- Tax benefits. The interest and property tax portion of your mortgage payment is a tax deduction. This will reduce your income tax payments and you could save or use the money saved to make renovations, make extra mortgage payments, or for other uses.
- Potential rental income. It might be possible to rent part or all of your property to generate extra income. The income you collect can go to paying off the mortgage. If you decided to purchase a second home you can make the rent higher than your mortgage payment which will pay the mortgage.
- Control of your property. As a homeowner you have creative control on what you can do to your house. There are no constraints placed upon you by landlords. You can choose what color to paint your rooms/house, change the landscaping, create a patio, extend your living quarters, and so much more.
- Builds credit. If you make your payments on time you can improve your credit profile. It looks good to credit companies to see that you are trustworthy with a large financial investment.
- Sense of pride. Homeowners normally take more interest in what is going on in their community since they usually tend to stay longer in their homes. Homeowners also create ties to the community and place roots that last longer than most renters.
- Privacy. One of the best aspects to homeownership is that the property is yours. You create the type of privacy you want. You do not have to worry about a landlord dropping by unannounced.
Advantages to renting
- Flexibility. Renting a home gives you the flexibility to change location. If you do not like where you live, you can ride out your contract and move without a lot of effort and cost. Your commitment is shorter. Most leases are for a year versus a 15 to 30 year mortgage.
- Repair costs. As a renter, most maintenance and repairs are the landlord’s responsibility. Many home repairs are expensive; especially if you call a repairperson.
- Dream locations. Most areas that are costly to purchase can be rather affordable as a renter.
- Insurance. Renters do not have to get renters insurance but it is highly recommended. Because renters insurance covers only your possessions it cost much less than a homeowner who has to cover not only their possessions but the property and structure as well.
- Credit requirements. Many landlords do check your credit score before you sign the lease. Purchasing a home will usually require a higher credit score especially to qualify for lower interest rates.
- Real estate market. Property values fluctuate and as a renter if the property or economic conditions of your area declines you are not tied to the property.
- Utilities. Many rental properties include utilities in the rent. Some even include cable, telephone, and Internet. Homeowners generally pay more for their utilities.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.