If you are even considering buying a home and making the life-switch from renter to buyer (homeowner), you have probably been given all kinds of advice one way or another. The truth is there is no universal “right answer”. Every situation, city, and budget is different. There are pros and cons to buying a home instead of renting a home in Phoenix. The biggest pro of owning a home is the steps to financial freedom and sense of community that you feel from being a property owner. On the other hand, renter’s maintain the freedom of movement and avoid a lot of hassles with mortgage, maintenance, and tax payments. Buying a home simply makes sense for some folks, but we understand that financially, it is not always the best move. So, how do you begin?
Price-to Rent Ratio
One way to determine whether you should continue renting a home or buy a home is to check the price-to-rent ratio (P/R ratio). This is the best way to stay objective. This number will tell you if the homes in your area are fairly priced!
price-to-rent ratio = average list price / (average rent * 12)
The threshold for the resulting price-to-rent ratio number is as follows:
P/R ratio 1-15 = much better to buy than to rent
P/R ratio 16-20 = sometimes better to buy, but it varies
P/R ratio 21+ = better to rent than to buy
So what do these numbers mean? First, the P/R ratio is the result of dividing the price of a home for sale by the price of a similar, nearby home for rent. For example, between a $100,000 home for sale in Phoenix and a nearby home that is $800 a month (which means $9,600 a year), the P/R ratio is 10.4. This means that is absolutely makes more sense to buy a home in that area rather than rent a home. Financially, you will save money over the long run without sacrificing home size or location. To find the specific price-to-rent ratio information about specific Phoenix area neighborhoods, call the C21 office today! The numbers are changing every month, so it’s useful to stay informed.
Before making any decision to move, you have to figure out a couple of numbers in your own life first. (Speaking to a C21 financial advisor can help you instantly organize all of your finances.)
Credit Scores for Mortgage Loan
Firstly, do you have good credit? This number is very different from your usual credit score because mortgage loans require a lot more backchecking. An “excellent” score is around 720. This is almost always good enough to get a mortgage loan and essentially means that the odds of your defaulting or becoming more than 90 days delinquent are 288 to 1. (Way to go, Mr. Responsible.) A “minimum” score is around 660; your odds of defaulting turn into 72 to 1. Anything below that and applying for a home loan might be out of your reach. Not to mention, the higher your credit score, the lower your monthly mortgage payment.
The Four-Year Rule
Once again, everyone’s situation is different. But as a general rule, if you plan on staying in the same home for four or more years, you should seriously consider buying rather than renting. Your year-to-year costs will be more stable if you buy a home. The Census Bureau says that 25% of homeowners had owned their home for two years or less, while over 50% has owned their home for seven or more years. What they didn’t ask was if those who sold before 2 years lost money on the transaction… Yes, it is never possible to fully predict how long you will remain in one place, you have to consider the real costs over the nominal costs in the long run. Think about it like this, you are slowly investing in a property that will eventually be yours outright. (And don’t forget those tax breaks and deduction for mortgage interest rates!)
The New York Times has a great “Is it better to rent or buy?” tool on their site. For personal assistance about your situation or for more information about the specific Phoenix metro area neighborhoods, C21 Northwest is the go-to professional for transitioning renters to buyers. 623.299.2148