Renters_ Are You Ready to Buy a Home_

H I L E Y O U S A V E U P Y O U R D O W N P A Y M E N T , T A K E
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H E S E 5 S T E P S T O G E T Y O U C L O S E R T O C L O S I N G .
T
Renters: Are You
Ready to Buy a
Home?
For renters planning to buy a home, preliminary steps like creating a
budget and saving for a down payment are obvious. Here are five more
advanced steps toward moving out of your rental and into a dream
home of your own.

Understand the full cost of homeownership
As a renter, a single rental fee covers your monthly housing payment. But as a homeowner, four main
factors go into your monthly housing payment: principal, interest, taxes and insurance (P.I.T.I.).
Understanding these costs will help you determine how much house you can afford.
Together, principal and interest comprise your monthly mortgage payment, with the principal paying
down your loan balance each month, and the interest paying your fee for borrowing the money. Use a
mortgage calculator to determine how much of your payment goes toward principal versus interest each
month.
Taxes refer to property taxes, which are assessed by the county you live in. They average 1.2 percent of
your home’s value each year.
Insurance — paid to a homeowner’s insurance company of your choice — is required when you have a
mortgage. Lenders require that your insurance cover the cost of rebuilding the home if it is ruined by fire
or other disaster. This “replacement cost” is determined by your insurer, and must be agreed to by your
lender. Insurance will typically cost $700 to $1,200 per year for a single family home.
For condo owners, there’s a fifth monthly cost category: homeowners association (HOA) dues. These
fees cover common area amenities, landscaping, ongoing upkeep and reserves for future maintenance
like roof replacement or exterior painting. These monthly dues range from $100 for cheaper condos to
$1,000 or more for luxury condos.
Single family home buyers can take a useful cue from HOA budgets, which generally require that at
least 10 percent of dues go toward reserves. Even if you’re not buying a condo, it’s a good idea to set
up a similar savings plan for future maintenance like replacing a roof or major appliances.

interest and property taxes are deductible when you file your
Mortgage
tax returns, and reduce taxable income.
annual
deductions significantly lower your cost of homeownership. For
These
for a $300,000 home with 20 percent down and a 30-year fixed
example,
at 4 percent, monthly P.I.T.I. is about $1,545. Tax deductions
mortgage
this total housing cost to about $1,215.
reduce
people judge the cost of renting vs. buying by comparing P.I.T.I. to a
Often,
payment. But to get an apples-to-apples comparison, you actually
rental
the example above of a $300,000 home that costs $1,215 per month
Using
taxes, you could compare this residence to a home that rents for about
after
If the $300,000 home was more spacious or in a more desirable
$1,200.
the math would seem to favor buying — but don’t forget this example
area,
you don’t have 20 percent to put down, you can still get a mortgage with
If
little as 3 percent down. However, if your down payment is less than 20
as
you’ll have to pay mortgage insurance, which is about .85 percent
percent,
your loan amount, and isn’t tax deductible.
of
monthly P.I.T.I. (which includes mortgage insurance) is about $1,995 on
Your
$300,000 home with 3 percent down and a 30-year fixed mortgage at 4
a
After tax deductions, this total housing cost drops to about
percent.
And you’d only need $9,000 for the down payment.
$1,614.
can also lower your rate and P.I.T.I. with a shorter-term loan like a 5-year
You
but rates on these loans will adjust in 5 years, so you risk having a
ARM,
higher payment if you plan to stay in the home longer than that.
much
preparing your credit score now
Start
scores are critical for getting the best mortgages with the lowest
Credit
Lenders want reliable on-time payment history as well as credit depth.
rates.
credit accounts are better, so renters with only one credit card should
More
obtaining more credit. Just note that your credit score can drop 5
consider
15 points when you first open a new account, then will come back up
to
you’ve established a good payment history.
when
Know your homeowner tax benefits
Study rent-vs.-buy math
have to look at after-tax-benefit homeownership costs and rent costs.
requires a $60,000 down payment.
Identify mortgages that fit your budget and timeline
https://www.zillow.com/blog/renters-prepare-to-buy-a-home-167285/
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