Photo illustration by Justin Vaughan
Homeownership has long been part of the American Dream — a signal of stability and prosperity, as well as an investment toward financial security.
Yet a survey released in early April by Fannie Mae, the Federal National Mortgage Association, showed consumer attitudes toward buying a home are at near-historic lows, with 76% of respondents indicating it’s a bad time to buy, citing mortgage rates, home prices and their own job insecurity. The Richmond region, however, continues to see high demand despite low inventory.
So, what’s the best way to decide if it’s time to stop renting and buy a home?
“There is no one-size-fits-all answer … despite what many people have been told over the years,” says Christopher Kapsak, a certified financial planner and associate wealth management advisor with Northwestern Mutual. “[In] the majority of conversations I’ve been a part of, people have said that owning a home is better than renting, because you’re ‘throwing money down the drain’ when you pay your rent. While this sentiment has some truth behind it, that’s not necessarily the case for all situations. It’s always a good idea to speak with a financial planner, who can help you think through the risks, pros and cons based on your individual circumstances.”
Christopher Kapsak of Northwestern Mutual
When buying a home, people expect to build wealth. Monthly mortgage checks pay down the loan balance, creating equity, and they expect to sell the home at some future point for a higher price. Owners also have a consistent house payment, alleviating any concern that a landlord will ask for a steep rent increase.
However, Kapsak advises his clients not to think of their house as investments, noting that his firm doesn’t want them to rely on their home equity to fund retirement needs. “Many people will live in their home for the majority of their lives,” he says. “Even if they downsize in retirement, there is no guarantee that the smaller home will cost less than their current home. Many times, [clients] upscale the type of home they live in.”
Additionally, Kapsak says, modern investment portfolio practices recommend a diversified approach to saving. A house is only one type of asset — real estate — and is only one piece of real estate. “This means the changes that happen in your home’s area may only affect your house and not the entire real estate market,” he says.
While renting doesn’t offer the same potential investment benefits, there may be compelling reasons not to buy. Consider how long you plan to stay put. “You will need to determine what the closing costs would be when you purchase the home and what the selling costs would be when you sold the home,” Kapsak says. Adding those fees to the other costs of homeownership might make renting the more affordable choice.
Among those costs can be unpleasant surprises in the form of unexpected home repairs, such as a new roof, HVAC system repair or plumbing issue. “The people we have worked with have often tried to account for the large, unexpected expenses that come with owning a home,” Kapsak says. “However, we have seen that not only is it difficult for people to have cash ready, they tend not to build in a high-enough contingency cost. If you choose to rent, you can offload many of these unknown expenses to your landlord.”
Renting may also be a way to avoid housing market swings. While economic forecasters can warn about factors that might affect housing costs, there are many variables at play. Few predicted the runaway sales during the COVID-19 pandemic, for example. “Renting avoids the risk of purchasing in an ‘up’ market and/or selling in a ‘down’ market,” Kapsak says.
At the same time, however, a volatile market can lead to rent increases. “When you don't have the supply, you have an increase in demand on both sides of the market, rental and housing,” says John Johnson, property manager for Rent In Richmond. “I feel sorry for people who are renting right now. My daughter’s rent went up 20%.”
“A lot of people are looking at their rents and saying, ‘This is crazy. Interest rates are 6[%], but I can refinance in a couple of years,’” says Laura Lafayette, CEO of Richmond Association of Realtors.
Another factor to consider is how to finance a home purchase. Jennifer Myers White, a vice president/senior loan officer with TowneBank Mortgage, says three elements are essential: credit, the ability to repay a mortgage and cash for the down payment and closing costs.
Think through the risks, pros and cons based on your individual circumstances.
—Christopher Kapsak, Northwestern Mutual
The most likely barrier to securing a loan, White says, is a low credit score. “Lenders look at debt-to-income ratio,” she says. “Debts must be within balance or a certain percentage of your income. A high car payment or credit card debt can be a problem.”
Different lenders have different credit score thresholds, White says. Currently, TowneBank’s minimum credit score is 620, although the bank also has a credit enhancement department that offers free help to potential homebuyers who need to raise their scores. Higher credit scores can open the door to lower mortgage rates and/or lower mortgage insurance rates.
Jennifer Myers White of TowneBank Mortgage
Of course, any lender wants to be confident that a loan can be repaid. Typically, White says, that means proof of employment — or full-time schooling — for the past two years, plus an average of variable income, such as bonuses, commissions, overtime or tips. “You don’t necessarily need to have been in the same job for the last two years, but we need to be able to average variable income from the same employer,” she says.
When it comes to the down payment, White says, buyers may be able to offer as little as 3% to 5% of the purchase price in cash. However, if the down payment is less than 20%, the buyer will also have to buy mortgage insurance. “Some people don’t like that because mortgage insurance protects the lender and not the buyer, but it’s a means to get in the house you want without a 20% down payment,” she says. Gifts of cash from family members are fully acceptable to cover down payments or closing costs for most Federal Housing Administration and conventional loan programs.
And, White notes, first-time homebuyers may qualify for a loan through Virginia Housing, a nonprofit established by the state in 1972 to support homeownership. Buyers who meet certain criteria can get a loan for 101.5% of the purchase price.
White says she likes to ask clients how much they’re willing to spend monthly for their home. “It comes down to everybody’s comfort with what they want to pay,” she says. “Many things go into a budget; people need to take into account all of those things and find out what works best for them.”
Kapsak says people often tell him they want to delay buying a house until prices or interest rates fall. He disagrees. “No one has a crystal ball that shows them where interest rates or home prices will go,” he says.
Instead, Kapsak advises, work with a planner to devise a realistic approach to your finances. “It really depends on what you’re trying to fulfill,” he says. “There’s a value to the intangible things that matter to you. It’s really a math and emotion thing. There are times when it makes sense to prioritize one over the other.”
