By Tracy Scott
Your lease is due to expire soon.
As you stare at the Expiration of Lease Notice, you realize that the decision isn’t as easy as it was this time last year. Should you renew the lease, continue on a month-to-month basis, or consider your other options? Like many Americans, you’re considering your housing alternatives. Renewing a lease is the path of least resistance, but is it still the right fit for your household?
Think back over the prior leasing period and recall how your life has changed. Did you get married, have kids, change careers, or increase your income? A lifestyle or financial change may be the reason to join the 46 percent of renters who considered buying a home during their last move.
Before you tour your first model home, remember that renting still has advantages. These often include:
- On-call maintenance and repairs at no additional cost;
- No real estate taxes;
- The ability to relocate quickly; and
- Lower utility and insurance costs.
Home ownership is appealing to many renters since it provides numerous perks that become more advantageous with each passing year. Some include:
- Investment in an appreciating asset,
- A stable housing payment;
- Tax advantages; and
- Greater privacy and more living space.
The deciding factor is usually a renter’s level of financial readiness.
Here are a few questions to ask yourself as you consider whether renting or buying is the best choice for your finances.
Do I have an emergency savings fund?
Financial professionals recommend homeowners (and renters) have at least three months of living expenses set aside in a designated bank account. These funds are earmarked for financial emergencies only and are held in an interest-bearing account with easy access such as a money market checking or savings account.
As a homeowner, you’re responsible for all maintenance and repairs. When the inevitable happens, an emergency savings fund can cover the expenses. With an emergency savings fund, there’s no need to use high-interest credit cards or unravel your monthly budget to pay for a plumbing repair or a new air conditioning unit.
Am I only making the minimum required payment to my creditors each month?
Paying your bills on time is a crucial component of a good credit score, which is needed to secure a home mortgage loan with a low-interest rate and favorable terms. However, if you’re only making minimum payments on your credit cards, you’re guaranteed to stay in debt longer and pay more for your purchases than initially planned. If you can only afford the minimum payments, then you might not be ready to buy a home.
By reducing or eliminating your credit card balances, you improve your credit health and reduce your debt-to-income (DTI) ratio. Mortgage lenders review your DTI to determine if your income can carry the weight of a mortgage payment.
Have I made late payments to any of my creditors within the last 12 months?
One late payment won’t ruin your credit. But, the more recent and frequent your late payment history, the lower your credit score. Potential lenders use your credit score to assess your ability to pay your debt obligations as agreed. Aim for at least 18 consecutive months of on-time payments with your creditors before applying for a mortgage loan. Borrowers with higher credit scores are often eligible for loan programs with low (or zero) down payments or other perks.
These questions are likely to be the first among the many you must ponder on the path to homeownership. Review your answers and consider how buying a home now fits into your long-term financial plan. The time to purchase your new home could be this year or in the near future. Regardless of your timeline, an Atlantic Financial FCU representative can walk you through the home buying process. We’d be happy to discuss your home mortgage financing options. Contact us today!