Should you buy or rent?
Cost gap is at lowest level in decades
Tips for saving for a down payment
1. Decide how much house you can afford. The first step is to set your savings goal. Research home prices and determine how much you can afford. Calculators can be found on most bank websites and on the FHA site at www.fha.gov.
The median price of existing homes in the U.S. is $165,100, according to the National Association of Realtors. A 5 percent down payment for a home that price would be $8,255.
2. Set up a savings plan. And set a deadline for reaching your goal. One method is to find the difference between your current housing costs and your projected monthly mortgage payment, and put that much away each month. Open a separate savings account for your down payment to minimize the temptation to tap the money for other needs.
3. Pare back expenses and raise cash. If you’re determined to buy a house as soon as possible, try living like a tightwad. Start by putting away the credit cards. Then cut out cable TV, switch to a less expensive cell phone plan and re-examine other aspects of your spending until you’ve pared back to just necessities.
4. Borrow from your 401(k). Most 401(k) plans allow participants to borrow from their accounts to finance a down payment. Some advantages to these loans include an easier acceptance process, generally lower interest rates than bank loans and the fact that you’ll be paying the interest to yourself. A key drawback is that the money will not be growing for your retirement, and if you leave or lose your job, you’ll have to pay the entire amount back or face stiff penalties plus taxes.
5. You may qualify for assistance. There are FHA-backed programs in every state. Most are aimed at low- and moderate-income, first-time homebuyers and usually require recipients to make some contribution. Visit the agency’s website at www.fha.gov to learn if you qualify for a program in your area.
Los Angeles ? Thinking of buying a home? Consider this: The gap between monthly rents and mortgage payments is at its lowest level in almost 20 years.
In some markets, the difference can be less than $100, according to a national study conducted for The Associated Press by Marcus & Millichap Real Estate Investment Services.
The study, part of a weeklong look at homeownership by the AP, found years of falling home prices and low interest rates have created the ultimate buyer’s market. But while buying a home is more affordable, it isn’t necessarily easier.
Tougher lending standards have made it harder to qualify for a home loan, and unemployment is at 9.7 percent. Tax incentives for homebuyers will expire April 30, and interest rates are expected to increase.
“Statistically, it’s a great time to buy,” said Hessam Nadji, managing director of Marcus & Millichap. “Psychologically, the consumer doesn’t feel like it’s a great time to buy.”
The analysis of 45 metro areas found the difference between the monthly mortgage payment on a median-priced home and the median rent is down to $256. The last time that gap was anywhere near that small was in 1993 when it fell to $264, according to the study.
Marcus & Millichap used median prices for the last three months of 2009 and calculated mortgage payments by assuming a 10 percent down payment and a 30-year fixed loan at 5.07 percent, among other factors. It also assumed borrowers paid for private mortgage insurance and didn’t include repair costs and tax benefits.
In Detroit, which has been hard hit by unemployment and falling home values, it’s cheaper to rent than own, though not by much: $75. The difference is less than $200 a month in markets such as foreclosure-ravaged Las Vegas, Atlanta, Cleveland, and Orlando, Fla.
Renting remains far more affordable than owning in traditionally pricier markets such as New York. In Manhattan, the gap is more than $4,000. Renters will save $1,000 or more a month in metro areas such as Los Angeles, Seattle, San Diego, San Francisco, and San Jose, Calif.
But even in some of these markets, longtime renters are testing the market.
There are also significant tax benefits, including capital gains deductions for property taxes and loan interest. A home appreciates in the long run and acts as a hedge against inflation. It helps diversify your assets, builds equity and provides a means of forced savings as you slowly pay down the principal.
Real estate also is a leveraged investment, unlike most others. If you put 10 percent or $20,000 down on a $200,000 house and it appreciates to $300,000, that translates to a 500 percent return.
On the flip-side, homeownership often comes with hefty repair bills. And values don’t always go up. Nearly a quarter of all homeowners with a mortgage owed more on their loans than their homes are worth in the last three months of 2009, according to First American CoreLogic.