Sunday, December 28, 2014

Ask Carrie: Buy or rent? And where to park your down payment until you decide?

Dear Carrie,  

My husband and I live in the San Francisco Bay Area and have been debating continuing to rent versus buying a house. Meanwhile, our down payment savings is making less than 1% interest. My financial consultant said not to move it into stocks if we need these funds in the next five years, but it’s hard to accept such a low rate of return. I’d love your thoughts on this.

—A Reader

Dear Reader,

Your financial consultant is right. Money that you’ll need in the next two to five years definitely shouldn’t be in the stock market. Yes, it’s hard to see it making so little interest, but just think how much harder it would be if you had to sell at a loss when it came time to buy your home. On the bright side, you’re lucky to have a down payment. Ideally, you want to be able to put at least 20 percent down to avoid paying mortgage insurance.

But having a down payment is only part of the rent vs. buy debate. Homeownership is as much personal as it is financial. For example, some people derive satisfaction from owning and caring for a home, and for others, it’s a burden. Some may get a sense of security from home ownership, while others may see it as a loss of flexibility. So think carefully about what owning a home will mean to you. And in any case, I advise you not to think of your home as an investment. If it goes up in value, great. But you can’t count on that.

If you’re emotionally ready to buy, it’s time to run the numbers—all of them. Not just the initial numbers—down payment, closing cost, fees and assessments—but also the ongoing obligations. There are property taxes, insurance, repairs and maintenance, and possibly additional funds for landscaping or renovations. All should be factored in from the start.

You also want to be sure you’re not stretching yourself to the limit and compromising the rest of your life. For example, before you commit to a home, make sure that you’re not carrying credit card debt month to month, and that you have an emergency fund equal to a minimum of three months’ essential expenses. Also make sure that you’re saving for retirement, and that that you’ll be able to continue to contribute after you own a home.

Next, take it a step further and use an online calculator to figure out the overall cost of buying vs. renting, both up front and long-term. Trulia.com has an easy one. The interactive calculator at nytimes.com gives quite a range of information, including how long you’d need to own the home before buying would make economic sense. In most areas of the country, you’d need to own a property for five or more years for buying to work in your favor.

Finally, be sure to get pre-approved for a mortgage. With your down payment at the ready and a clear idea of how much house you can afford, you’ll be in a much better buying position.

I know none of this will increase the return on your current down payment, but think of it all as an investment in your ability to get the house of your dreams. That’s a return you can enjoy for many years to come.

 

 

Looking for answers to your retirement questions? Check out Carrie’s new book, The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions (Crown Business, 2014), available in bookstores nationwide. Read more at http://schwab.com/book.

This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. COPYRIGHT 2014 CHARLES SCHWAB & CO., INC. MEMBER SIPC. (#0614-3779)

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Carrie Schwab-Pomerantz
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