Rents are trending upward in many cities around the U.S. This means you should consider the costs associated with buying and maintaining a home (thus investing in your future) versus renting a home (thus investing in your landlord’s future).
Let’s take one ‘hot’ rental market, Nashvile, TN for example, to demonstrate how buying a home is often times the smarter financial path.
The average rent in Nashville is $1,431 a month in 2016, as compared to the $881 per month average just two years ago.* That is a big change!
Over the course of five years, that’s $85,860 in rent to live in a place that (though you may love it) isn’t actually yours. Did you know you could be paying a monthly mortgage payment that is lower that what you are currently paying in rent?
The mortgage payment on a $207,300 house (the average home cost in Nashville, according to The Tennessean) is $1,310.
That’s $121 less than the average cost of rent.
A lot of renters are finding that buying a home is not as unattainable as they assumed it might be. In fact, it might be the more affordable option in the long run.
Have you thought about buying a home, but have no idea where to start?
The first step is to budget with home buying in mind.
The first three steps in Dave Ramsey’s seven baby steps to financial peace are a great place to start.
- Baby Step 1 – $1,000 to start an emergency fund.
- Baby Step 2 – Pay off all debt using the debt snowball.
- Baby Step 3 – 3 to 6 months of expenses in savings.
Once you have some money stocked up in savings and any outstanding student loan or car payment debt in under control (even if it’s not totally paid off!), you can start to do some research on how much house you can buy.
Keep in mind: Often, homebuyers rely on their lender or realtor the tell them how much house they can buy. Don’t be pushed past your financial comfort zone. Know your budget before meeting with a lender or realtor.
As you’re working out a house budget, you need to determine your net monthly income. How much money are you actually bringing home each month, once you account for all your big expenses? Make categories for all your expenses. This should include housing, transportation, insurance, education, debt, entertainment, taxes, and unexpected costs, as well as any other macro costs you can think of.
Once you know your income and your monthly expenses, you can plan your mortgage payment. Many lenders allow your mortgage pay to go up to 43% of your income (and sometimes even beyond!). Dave Ramsey and Churchill recommend that no more than 25% of your take-home pay be applied to your mortgage. That way, you won’t go into debt trying to pay off your home!
You can choose the industry standard or the debt-free standard, or anywhere in between. Knowing the differences between the two gives you the freedom to make an informed choice before committing to what might be the biggest purchase of your life.
Saving money and starting a home buying budget are the first two steps in preparing to buy a home. Once you start the process, you could be amazed by how attainable purchasing your first home can be!
Have more questions about buying a home? We would love to talk to you!
*Source: The Tennessean, March 21, 2016.