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May Financial Fitness Challenge
Know When to Buy a House
By Susan Tiffany, CCUFC

Before the economic crisis, the mantra was that buying a house was a better financial choice than renting. Everyone, it seemed, bought in to that conventional wisdom. Then, as home values tumbled and people saw equity they'd built in their homes evaporate, the smart advice was that renting was the only rational decision.

The truth, as usual, lies somewhere in between. Your challenge is to decide which option makes sense for you.

Lessons learned the hard way

For decades, before the Great Recession, most financial counselors believed that owning a house was the best way for average consumers to build wealth. That was true, and still is, if the house rises in value over time, or appreciates.

The combination of growing market value and declining loan balance, as you paid off the mortgage loan, assured that you were wealthier owning a house than renting. When you rent, your payments only enrich the landlord-you do not participate in the property's equity growth.

We've learned, though, that housing markets do not always rise. They can stagnate, and they can fall. And that doesn't make buying a house a bad idea-it just means we have to be more realistic about expectations and take more into account before making a decision.

Recent improvements in the economy and in most housing markets are making it smart-really smart, since home loan rates are so low-to think again about buying a house.

Housing turns the corner

Trulia, the online real estate company, recently reported that it's now more affordable to buy than to rent in 98 of 100 markets. Two standout exceptions are Honolulu and San Francisco (ironically, home to Trulia).

Three facts support the affordability argument:
  • Home prices are down.
  • Mortgage interest rates are low.
  • Rents are rising.
Ken H. Johnson, a professor of real estate at Florida International University, Miami, told CNNMoney.com that he believes home prices nationally have hit bottom.

"The ship has turned," he says. "Markets should slowly start to recover. Housing will return to its traditional role of a safety investment."

Buying presents challenges

Those rising rents are a sticking point for consumers hoping to buy-you can't save a down payment if rent is taking an ever larger chunk of your budget. Consider these factors, too, when you face the rent-or-buy question:
  • Credit score. If your score is 760 or better, lenders will be happy to see you. Focus on improving your score with consistent, timely payments before approaching a lender. Bring your credit balances down and don't apply for more credit unless you truly need it. Go to AnnualCreditReport.com and request your free credit report from the three major credit bureaus; make sure no errors are dragging your score lower than it really is.
  • Debt ratios. The amount you owe, as a percentage of your income, can affect how much you'll be able to borrow, or even if you'll be able to borrow.
  • Job stability. Another durable lesson from the recession is that no job is guaranteed. Still, you usually know about how likely you are to continue working. Is your company laying off workers? Or, is your company likely to ask you to move to another location to keep your job? Answering Yes to either question suggests this might not be the best time to buy a house.
  • Upkeep demands. Prepare for ongoing fix-up costs by saving some money each payday to build your maintenance account.
Call 800.444.6327 to speak to a Real Estate Consultant at NuVision and let them help you sort through this big decision.

Source: Home and Family Finance Resource Center, CUNA



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