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It Still Makes Sense to Buy Versus Rent

By / Home Ownership / Comments Off on It Still Makes Sense to Buy Versus Rent

Nearly a full third of households are still renting. If you’re one of them, you could be paying a hefty price.

Before talking about purchasing a house, it’s important to note two things. First- and this is extremely important- the housing market is actually localized. So the outlook in your hometown may be different than another city across the state or on the other side of the country. Second, home prices are tied to employment. For example, if someone feels like their job is in jeopardy, it might be enough to stop them from making a move. So, if you local job market is feeling a pinch, the home prices in your area may be down as well.

But with all those factors under consideration, it still makes sense to buy instead of rent. In fact, renting may be costing you a bundle.

Let’s look at an example…

If you are paying rent at $1,500 per month and your landlord increases your payment by a modest 5% each year, you would wind up paying just about $100,000 over a 5-year period! Worse yet, after forking over $100,000, you still would have nothing to show for it.

And speaking of having nothing to show for it, how about any improvements you might make to a rental property? It’s not uncommon for renters to freshen up the paint, install new light fixtures or plant some nice flowers outside. But guess what…all your efforts, labor and the benefit of that improvement belong to the landlord, not to you.

With convenient down payment options still available for qualified buyers, affordable home prices and low interest rates, the very same money could have been used towards home ownership.

Even using a standard 30-year fixed program, a mortgage of $300,000 could be obtained with a total monthly mortgage payment – including property taxes and insurance – of around $2,200. Assuming a 25% tax bracket, this would be equivalent to the average amount spent on rent during the same period after your tax benefit.

And the benefits of home ownership are quite considerable. Because the mortgage is being paid down each month, equity is being built. After 5-years, the $300,000 mortgage could be reduced to $279,000, adding $21,000 to your net worth!

But if laying out the initial increase in monthly payment and having to wait for your tax benefit to show up next April is a tough nut to crack, the IRS wants to help. Instead of waiting to file for the tax benefits derived from you new home purchase, you can simply adjust the amount of your withholding. This allows you to have less tax withheld from each paycheck so you can handle the new mortgage payment more comfortably throughout the year. In essence, you are taking your tax refund as you go instead of letting uncle Sam hold it all year, interest free.

Visit www.irs.gov and use the IRS withholding calculator. This very handy tool can quickly show you the impact that a change in withholding will do to your net paycheck. Remember to balance this with the expected refund and it is always a good idea to check with your tax advisor.

Don’t fall victim to the national headline hype. Talk to a professional who understands your local market. And remember, buying a home is a big step, but is almost always one in the right direction.

Reference: www.mortgagemarketguide.com

F.H.A. Loans More Affordable

By / FHA / Comments Off on F.H.A. Loans More Affordable

An announcement by the Obama administration that the Federal Housing Administration would lower its annual insurance premiums by 0.5 percentage point could make it possible for a quarter-million more borrowers to buy their first homes, according to the agency’s estimates.

Since 2010, insurance premiums on the low-down-payment mortgages backed by the F.H.A. have soared 145 percent in order to help raise funds to restore the agency’s badly depleted reserves. But there have been growing complaints that the increases have made the loans too costly for the buyers who need them most.

In a press briefing on Thursday, Julián Castro, the secretary of the Department of Housing and Urban Development, which oversees the F.H.A., said an estimated 400,000 creditworthy borrowers had been priced out in 2013 because of higher insurance costs. He asserted that the F.H.A. was now in a strong enough position to broaden access to credit by reducing annual premiums to 0.85 percent of a loan’s value from the current 1.35 percent.

For new F.H.A. borrowers, the reduction would mean an annual average savings of $900, Mr. Castro said.

F.H.A.-backed loans became the go-to source of financing after the housing market crashed and private lenders pulled back. But default rates later soared, primarily on loans made from 2007 to 2009, leaving the agency’s insurance fund with a negative value of $16 billion by fiscal year 2012.

Tighter underwriting standards and a series of six increases in insurance premiums have put the fund back in the black, with a balance of $4.8 billion, according to the F.H.A.’s annual report published late last year.

In a letter last month to Mr. Castro, 18 senators cited the fund’s return to “solid footing” as reason to re-examine insurance premium levels to determine whether they could be “reasonably and safely lowered” to levels more affordable for “creditworthy families.” The senators’ request followed earlier pleas for premium reductions by various consumer and industry groups, including the National Association of Realtors and the Mortgage Bankers Association.

Earlier fee increases were “eliminating a lot of the people that F.H.A. is designed to help, and that’s the lower-income and first-time buyers,” said Chris Polychron, the president of the National Association of Realtors.

Mr. Polychron cited research by his association showing that the percentage of first-time buyers using F.H.A. loans shrank to 39 percent from 56 percent over the last four years.

F.H.A.-backed loans are popular with many buyers because they require as little as 3.5 percent down, and the minimum FICO score requirement of 580 is lower than on conventional loans.

But the F.H.A. has been trying to balance its mission to expand access to credit against concerns about financial risk. While far more stable, its insurance fund has not yet amassed the required 2 percent capital reserve ratio, a target it was projected to reach in 2016.

Mr. Castro said the premium reduction would slow the agency’s progress toward that target by a couple of months. He emphasized that the new premiums were still 50 percent higher than pre-crisis levels, and that underwriting standards would not be relaxed.

“This action is not a return to the past,” Mr. Castro said.

The projected savings for borrowers over time are substantial. According to Zillow, the real estate information site, on a $175,000, 30-year F.H.A.-backed loan, a buyer putting down 3.5 percent would save nearly $4,000 over five years.

This article was originally published on 1/9/2015 at nytimes.com. View the original here.