Despite recent trends, buying a home is still cheaper than renting in the long run

If you're preparing to buy a new home, recent trends may have you thinking you've missed the perfect opportunity. Home prices, which were down after the bubble burst a few years ago, are starting to recover. In addition, interest rates are rising. These two developments may have you reconsidering a move.

Many may think that continuing to rent seems like a more viable option compared to buying a home. They choose to wait till interest rates come back down. For most, however, this is a mistake that will cost them money in the long run because many in the industry think that interest rates will continue their climb slowly upward.

If you're in the same situation, don't worry. Depending upon where you live, buying a home will still save you money over the long term. There are three things that make buying a home cheaper:

Interest rates

The simple fact is that higher rates mean a higher cost of owning. For most, rates would have to climb to over 10.5% in order for renting to be the better option.

Itemized deductions

Usually, mortgage interest and property tax payments are deductible, depending upon the state in which you live. The average American family is in the 25% tax bracket. On average, regardless of whether you own or rent, buying is 44% cheaper. If you only take the standard deduction, buying is still 35% cheaper than renting.

Staying put longer

The cost of buying and selling a home can be more than 10% of the home's value. If you stay in the home longer, you're able to spread those costs over more years. Forbes says that buying is 44% cheaper than renting if you stay put for 7 years, 37% for 5 years, and 20% for 3 years.

Based upon those three things, you would have to have a high interest rate, not take deductions and sell your home quickly in order for renting to be the better option.

The tipping point

Forbes discusses the tipping point, (http://www.forbes.com/sites/trulia/2013/06/14/buying-cheaper-than-renting-til-mortgage-rates-hit-10-5/) which is the interest rate at which renting a property is cheaper than buying it. Because of taxes and cost of living, areas primarily in California, New York and Hawaii have the lowest tipping point.

That being said, for every one of the top 100 largest metropolitan areas, buying is a better deal right now. Depending upon where you live, the tipping point ranges from 5.2% in San Jose, CA to 35.8% in Detroit.

If you're considering buying a home, although you may have missed THE PERFECT time to buy, now is still a very good time. Home prices are just beginning to rise and interest rates are still very low. Talk to a REALTOR to discuss your options.

Insurance companies scaling back water damage coverage

Homeowners have not been very profitable for insurance companies historically and the recent weather events (hurricanes, floods and tornadoes) have caused them to lose money. As a result, companies have looked for ways to squeeze profit from policies and may be squeezing homeowners as a result.

For example, it has come to light recently that many companies are not writing new policies in hurricane areas, especially Florida. But insurance providers are also cutting coverage in ways that are not covered by the news; that affect homeowners across the country; and that you may not know about until it’s too late.

The 14-day rule

Many insurance companies have quietly changed their policies over the past few years. In days past, if a slow leak developed in your plumbing, which is capable of causing extensive floor and drywall damage and mold growth, you didn’t have to worry about being covered.

Damage caused by a single event, like a dishwasher whose valve fails and flooding your kitchen, is covered. Many insurance companies have instituted the 14-day rule. In many cases, the source may be hidden behind a wall or foundation. Also, the evidence of the leak does not show itself immediately. If the leak occurred over more than 14 days, chances are you may not be covered.

What you should do

On your side, watch your water bill; an unusually high bill may point to a big leak. Keep a watchful eye for evidence of water damage, particularly around sinks, tubs and toilets. You may also consider buying wireless water alarms. They are inexpensive and will go off at the smallest leak.

Most people don’t read their policy. If you have a new policy or recently renewed your policy, call your agent and ask about coverage for such events. They may advise you to increase your coverage. The important thing is to know what your policy covers and what it doesn’t. That’s not the kind of surprise you want.

The Difference between Rate and Annual Percentage Rate

When you buy a house, chances are that you’re not paying cash. You’ll need to secure financing in order to pay for it. One of the things that you’ll notice is that the rate and the annual percentage rate (APR) are not the same.

The advertised interest rate is the cost of borrowing money and expressed as a percentage. Lenders must comply with the Truth in Lending Act, which requires that the APR be published as well. This number, also expressed as a percentage, includes the interest rate and:

• Points – both origination and discount


• Underwriting, loan processing and document prep fees


• Commitment fee


• Attorney and/or title closing fees


• PMI (private mortgage insurance) or MIP (Mortgage insurance premium) for FHA


• Prepaid interest

Why APR is important

If you’re considering two different loans with the same rate, the APR lets you know the true and total cost of the loan. The advantage of APR is that it allows you to more accurately compare the cost of borrowing from different lenders, since they may have different fee structures. A lower rate may not be your best option. It is possible that a lender may charge a higher interest rate but lower fees.

Why APR isn’t important

The fees associated with the loan are usually paid up front. It is calculated over the life of the loan, which is usually 30 years. If you’re going to sell your house in a few years or you plan to refinance, the APR may not be as big a consideration to you.

Although interest rate and APR are expressed as simple percentages, the way both are calculated are fairly involved. Make sure to ask your mortgage lender to fully explain all costs and fees of your loan so that you have a good understanding of the total costs.

Items most movers won’t move

Depending upon the state in which you live (or are moving to), there are some things your movers will not move. To save time and headache, ask for a list of items from your moving company.

Some items will not be moved because they pose a danger to you and the mover. They can also damage your belongings as well. For those reasons, the insurance companies that cover the movers will not allow certain items to be transported.

If the company you choose does not supply you with a list, be sure to ask for one.

Hazardous, flammable and explosive material

Of course, some of these items you will want to take with you. Some you should consider leaving behind or taking to places that will properly dispose of them. Some common hazardous items include: acids, bleach and solvents; ammunition and weapons; flammable and explosive material such as kerosene, fireworks, propane tanks, aerosol cans, fertilizer, charcoal, engine oil and gas.

Perishable items

Moving companies will avoid taking perishable items simply because if there is a delay in delivery, items will spoil or die. These items include food, plants and pets. Regarding house and outdoor plants - check with your new home state concerning any plants that you may or may not bring to your new home.

Personal and financial

You should personally transport any items or anything of a financial or personal nature that cannot be replaced. Items that would be very inconvenient if the moving truck is delayed are also included on this list:

• Cash and jewelry


• Bonds, financial statements, stocks and checkbooks


• Address books, photos and personal files


• Keys, both car and home


• Computers and software


• Medicine

This is by no means a complete list. Check with your moving company representative for a complete list of items they will not transport to your new home.

Clearing up escrow confusion

When you buy a house, you're going to hear the word "escrow" thrown around often. It's one of those terms that people just accept without really knowing what it is. Then later, there is confusion because they forget that when you purchase a home, usually there are two escrows involved.

First things first. Here is the definition of escrow: a bond, deed, or other document kept in the custody of a third party and taking effect only when a specified condition has been fulfilled. (Oxford Dictionary)

When you make an offer on a house, your agent will have you write an earnest money check, which will be deposited in escrow while you and the seller negotiate the details of the contract. The check is deposited with an impartial third party - an escrow agent, title agent, or closing attorney - who is not involved in the transaction.

They manage all the incoming paperwork and money from buyers, sellers, lenders and agents. In addition, they handle the title search, schedule the closing meeting, disburse the funds and send the paperwork to the county. When all of this is completed, escrow closes.

You'll receive a statement of escrow closing. Make sure to look this over carefully. If you spot any discrepancies, report them to the closing agent immediately. This statement should be kept with your most important financial records. You’ll need it when you file taxes, too.

Your second escrow

You'll also have escrow for taxes and insurance, which can be abbreviated as "T&Is." Your mortgage lender may require you to begin funding this escrow account by making a payment into the account at closing. They may ask for the total of the first year's estimated T&Is upfront or they may add it to your monthly payment.

No matter how payment is arranged, the escrow is revisited every 12 months. If you overpaid, you may get an escrow refund. This is common. Your lender will then recalculate the cost for taxes and insurance and the amount that goes into your escrow fund will change. Because the value of your home will go up and down, you may see a fluctuation in your monthly payment from year to year.

Understanding the home inspection process

Although a home inspection is not required by law, it is always a good idea to have an objective third party inspect a home you wish to buy. A reliable home inspector can save you literally thousands of dollars in unexpected home repairs.

Paying for the inspection

Usually, the buyer pays for the inspection. But everything in real estate is negotiable. Put it in the contract to split the cost of the inspection to see what the seller says. If they are motivated – and confident in what the inspector will find – they may agree, which will save you a few hundred dollars.

What home inspectors look at

Home inspectors start by looking at exterior features: outside walls, soffits, decks, roof, chimneys and drainage conditions. On the interior, they examine the condition of windows, doors, plumbing fixtures, electrical outlets and switches. They examine the heating and cooling systems. They also look at the attic and crawl space to ensure that they have adequate insulation and ventilation.

And what they don’t

Home inspectors are generalists and usually not qualified to assess things like pools, septic systems and trees and shrubs. If you want to have a termite inspection done, expect to hire a specialist in that area.

Accompany the inspector

A written report doesn’t give you the whole picture. Although it’s not required, if you go along on the inspection you’ll have a better indication of the issues associated with the home.

Questions to ask

It is essential that you trust the home inspector. Make sure to ask questions about the inspector’s background and qualifications, their training and what they’re looking for when they perform their inspection. Here’s a list of questions to ask your inspector (http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/insp/inspfaq) as suggested by HUD.

Finding a home inspector

If you’re in the market for a new home, ask your real estate agent for a list of trusted home inspectors that they use regularly. You can also ask friends and relatives for a referral. Make sure to do some research on the inspector; look for reviews online. In addition, make sure to ask to see a sample report. That way you’ll ensure that you’re comfortable with what the inspector reports and how they report it.

A home inspection is protection for the investment that you’re planning to make. Weighed against the potential cost of repairs and what you pay for your home, it is a wise decision to protect your investment.

15-year mortgage

For decades, when home buyers were discussing the terms of their mortgage, it was generally understood that it would be paid off in 30 years. But a couple of decades ago, buyers started hearing about the option of a 15-year mortgage.   The allure of the shorter term mortgage is obvious: Shorter terms means you pay less interest.

It isn’t the deal it once was

Using the mortgage calculator at Realtor.com, we can see just how much your payment will be. With a buying price of $200,000 and a 20% ($40,000) down payment, your payment will be $1,086 on a 15-year mortgage at 2.75% APR. On a 30-year mortgage for the same house, same down payment, with 3.5% APR, your payment will be $718. That’s a difference of $368.

The drop in interest rates isn’t what it used to be. In the 1980s, there was a discernible difference in interest rates. The monthly payment on a 15-year mortgage at 8.5% would be $1575, while the same house at 10.5% for a 30-year note would be $1,463. That’s a difference of $108.

Strain on the budget

Many home buyers find that coming up with the extra money month in and month out is prohibitive. Any change to your financial situation could make it more difficult. Having children, buying a new car, a bout of unemployment… anything could put a strain on your already tight budget.

Less flexibility

Paying over 50% more on your mortgage requires fiscal discipline, to be sure. It also means the difference between investing in retirement, taking vacations and spending less money on almost everything in your life.

Paying off your mortgage early

Many people are opting for the 30-year mortgage and taking steps to pay it off early. There are many options for homeowners who want to pay down their mortgage at an accelerated rate. Paying bi-weekly is one option. Simply paying more is another. As your salary rises, pay that much extra on your mortgage. You can also apply windfalls such as tax refunds and bonuses to your principal.

For more ideas about your mortgage options, talk to your REALTOR® and loan professional. They should have ideas to determine your best course of action.