You can fulfill the American dream of homeownershipby owning an apartment just as you can with a traditional single-tenant home. Owning instead of renting can also be good for your finances, as you’re building equity in a property you can later sell instead of throwing money away to a landlord. So if you’re interested in purchasing an apartment for yourself and your family, here’s what you need to know.
Do you have questions about how an apartment purchase can affect your long-term financial plan? Speak with a financial advisor today.
The “Rent vs. Buy” Decision
Perhaps the biggest factor in deciding whether to rent or buy is the length of time you expect to stay in your new apartment. Generally speaking, if you don’t anticipate living there for at least five years, renting is likely to be a financially wiser move.
If you plan to live there for five or more years, compare how much you are paying to rent with how much you could be paying to own. A mortgage payment will generally be less than rent, assuming the place you want to buy is similar to the place you’re renting. That’s because your landlord is paying the same as you would for principal, interest, taxes, homeowners association fees, and repairs, plus a little extra for profit.
Still, there’s more to owning than the payment. To buy something, you’ll have to put up more cash than you would need to sign a lease. The biggest outlay will be for the down payment. The amount required for this depends on the type of mortgage you get and potentially even where the home is located.
Most government-backed mortgages insured by the Federal Housing Administration (FHA) call for a low down payment of at least 3.5% of the purchase price. Veterans may even be able to get a $0 down payment loan through the Department of Veterans Affairs (VA). For a conventional loan not backed by the government, you’ll be expected to put down 20%.
For example, if the apartment you want to buy costs $200,000, you can expect to pay $7,000 for a 3.5% FHA down payment. On the other hand, a conventional lender will want $40,000, or 20%, down.
You’ll also need cash for closing costs. These pay for the survey, appraisal, home inspection and title insurance, among other costs. Closing costs on a $200,000 home can total a few thousand dollars. You may be able to include closing costs in the loan amount, although this will obviously increase your mortgage payments. You can’t usually borrow the down payment, however. You’ll need to have that in cash.
Calculating What You Can Afford
Now it’s time to see how much you can afford to pay. Start by figuring out your debt-to-income ratio. To do this, add up all your monthly debt payments, such as credit cards, car loans, student loans, child support payments, alimony, and your estimated mortgage payment.
You can then divide this figure by your monthly income and express the result as a percentage. If your total monthly debt payments come to $2,000 and your monthly income is $5,000, you’ll divide $2,000 by $5,000. The result is 0.4, or 40%.
Lenders use this debt-to-income ratio to determine how much payment you can afford to make on a monthly basis. They will usually look for a debt-to-income ratio of no more than 43%. If you find yourself above that mark, it may be tough to qualify for a mortgage. You can improve your debt-to-income ratio by planning for a lower mortgage payment. That usually means buying a lower-priced apartment.
SmartAsset’smortgage calculatorcan help you simulate the entire process above. All you need is the full price of the home, the size of your down payment, the type and length of the mortgage you’re getting and the interest rate you expect to receive. Don’t neglect other costs, though. These include property taxes, homeowners insurance and possibly homeowners association fees. All of these costs combined can add several hundred dollars a month to your payments.
Buying Into Condos 0r Co-ops
An alternative to buying an apartment might be buying into a set of condominiums or a co-op, which physically is set up similarly but can be quite different to manage. When you purchase a condominium, you are buying a unit in a building. That means you will share the costs of running the building with other condo owners. Purchasing a co-op means buying part ownership of the corporation that owns the building. Rather than a specific unit, you’ll own shares in the corporation.
Mortgage lenders have different requirements for condo and co-op loans. For instance, they may want to see that a condo association has enough money in the bank as financial reserves to cover any needed repairs or maintenance. Some lenders are reluctant to make co-op loans because they can’t repossess the unit if you have trouble making payments. So if you’re looking for a loan then you may find an apartment or an affordable single-family dwelling to be a better option.
Getting More Help
Would-be apartment buyers can get help navigating this home buying journey from a licensed real estate agent. An agent can help with questions about pricing, taxes, fees and communities. At the same time, he or she can provide valuable insight into how to negotiate with sellers.
You can even integrate a financial advisor into your homebuying experience. These individuals will often work together with real estate agents to ensure that the decisions you’re making are aligned with your overall financial goals. Plus, they can answer your questions about what you can afford and how much of a loan you can target.
Bottom Line
Overall, buying an apartment can be similar to buying a single-family house. The loan application and closing procedures are very similar. The important part is determining how much home you can afford and then determining whether you should buy or rent. Once you’re able to figure that out then you can set up your finances in preparation for your decision.
Tips to Improve Your Finances
- Although financial advisors typically deal with shaping your investment strategy, they often can handle much more than that, such as helping you with buying an apartment.Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- A well-thought-out budget is the first step toward achieving full control over your finances, especially when you’re thinking about buying property. If you’re finding it difficult to begin the budgeting process, SmartAsset’s budget calculatorcan offer a few suggestions that will start you off on the right foot.
Photo credit: ©iStock.com/ewg3D, ©iStock.com/mizar_21984,©iStock.com/Hispanolistic
Alright, let me lay down the expertise on this topic. First off, the decision to buy or rent is a complex financial choice that requires a deep understanding of various factors. Now, in the realm of real estate, the term "equity" is key. Equity is the value of the property you truly own, and it grows as you pay down your mortgage. It's essentially a stake in your property's worth.
When you consider the "Rent vs. Buy" decision, you're entering a financial chess game. If you're not planning to stay put for at least five years, renting might be the strategic move. But if you're in it for the long haul, owning comes into play. Mortgage payments tend to be lower than rent, and you're not just paying for shelter; you're investing in an asset.
Now, the financial jargon in this article is no joke. Down payments, closing costs, debt-to-income ratios—these are the weapons in your arsenal. The down payment is your initial attack, and it can vary depending on the mortgage type. Government-backed mortgages like FHA can get you in the game with just a 3.5% down payment, but conventional loans demand a heavier upfront investment—20%.
Closing costs are the reinforcements you call in to seal the deal. Survey, appraisal, home inspection, title insurance—the whole cavalry. Remember, you can't usually borrow the down payment; it's cold, hard cash. So, prepare for battle by calculating your debt-to-income ratio. If it's above 43%, your mortgage aspirations might face resistance. Consider a lower-priced apartment to improve your chances.
And don't underestimate the importance of preparation. SmartAsset's mortgage calculator is like having a seasoned strategist in your corner. It helps you simulate the entire campaign, from down payment to monthly payments, factoring in property taxes, homeowners insurance, and potential HOA fees.
Now, let's talk about alternative strategies—condos and co-ops. Buying into these is like joining an alliance. In condos, you share the load of running the building with fellow owners. Co-ops, on the other hand, mean owning shares in the corporation that owns the building. But beware, lenders have different rules for these alliances.
To navigate this battlefield, recruit a licensed real estate agent and consider bringing in a financial advisor. They're like your tactical advisors, guiding you through pricing, taxes, fees, and helping align your decisions with your financial goals.
In conclusion, buying an apartment is a strategic game. Understand your financial arsenal, calculate your moves, and bring in the experts to secure victory in the world of real estate.
