Dear Carrie: I’m one year into my four-year contract with the Army. I currently live off base but hate wasting my money on rent. I’m thinking about buying, especially since interest rates are so low and real estate prices just keep climbing. I don’t have much cash, but I don’t need a down payment for a Veterans Affairs loan. I figure if I stay in the Army and have to move, I can either sell or rent it out. My dad is all in favor of buying now, but my mom says I should wait until I leave the military. What do you think? —A Reader
Is Renting a Waste of Money?First, let me say that I don’t believe renting is always a waste of money. In fact, depending on the circumstances, renting can be cheaper and more practical than owning a home.
Renting can make a lot of sense if you’re not going to be in the same place for at least five to seven years. If you stay in a home for many years, the substantial upfront costs of buying a home are spread out over a long time. Not so if you’re forced to move soon. Plus, as we saw during the Great Recession 10 years ago, homes don’t always appreciate in value, and you wouldn’t want to be forced to sell in a downturn.
Renting can also make sense if you don’t have ample cash reserves. As a renter, you can call the landlord if something breaks. When you own, you are the landlord, and you’re on the hook for all the costs of maintaining and repairing the property. On the flip side, when you buy a home, you have the ability to build equity. But this takes time, sometimes many years.
Consider Total Costs and AffordabilityThe cost of owning a home involves a lot more than the purchase price. In addition to paying your mortgage, you’ll also have to pay for property taxes, property insurance, maintenance and repair costs, utilities, and possibly HOA fees.
And there are closing costs associated with buying a home. These are one-time expenses and fees—including appraisals, title insurance, attorney’s fees and more—which, according to Realtor.com, can run as high as 5 percent to 6 percent of the purchase price.
So think about all of this in the context of your entire financial picture. A general financial planning guideline is that your monthly mortgage payment shouldn’t exceed 28 percent of your gross monthly income, and your total monthly debt payments shouldn’t exceed 36 percent. If your expenses are higher, you may not have room to cover other essential expenses—including retirement savings.
What Happens If You Have to Move?Deployment or permanent change-of-station orders can be a huge issue when you’re a homeowner. As a renter, service members are protected under the Servicemembers Civil Relief Act (SCRA) in breaking a lease without penalty. The SCRA also provides interest rate and foreclosure protections if you own a home, but you still have to manage mortgage payments and the care of the property while you’re away.
VA Home Loans Have AdvantagesGenerally, active-duty service members, veterans, reservists and National Guard members in good standing who also meet other eligibility requirements qualify for a VA loan, as do certain surviving spouses. VA loans can be used to build, purchase, or refinance a primary residence. They’re not designed to finance second homes or investment properties, although you can rent out a home with a VA mortgage once you’ve lived in it.
As you mention, one of the benefits of a VA mortgage (unlike a conventional mortgage) is not having to make a down payment. But just because you don’t have to doesn’t mean you shouldn’t. In fact, the smaller your down payment, the more you have to borrow and the bigger your monthly payment. Conversely, the bigger your down payment, the smaller your mortgage payments.
VA Home Loans are provided by private lenders, such as banks and mortgage companies. The VA guarantees a portion of the loan, enabling the lender to provide more favorable terms. Other benefits often include the following:
• No private mortgage insurance (PMI) requirement. A PMI is usually required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price.
• No pre-payment penalty.
• No minimum credit score (although the lender may have its own requirements).