BY CARRIE SCHWAB-POMERANTZ
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
Dear Reader: As the different opinions in your family demonstrate, buying a home versus renting is often a tough decision — and especially complicated for someone like you who may be forced to move without much notice. A Veterans Affairs loan can certainly help with the purchase, but there’s a lot more to consider as you look to the future.
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.
A good exercise is to use an online calculator to estimate the costs of renting vs. owning. A lot depends on your location. In some areas, there’s a big difference; in others, not so much. Just be sure to gather your information and do a careful analysis before you decide.
Consider Total Costs and Affordability
The 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% to 6% 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% of your gross monthly income, and your total monthly debt payments shouldn’t exceed 36%. If your expenses are higher, you may not have room to cover other essential expenses — including retirement savings.
As an active-duty service member, your basic allowance for housing (BAH) and basic allowance for subsistence (BAS) also come into play. Whether you rent or buy, it’s possible to have allowances left over each month to pay for things like utilities and other household expenses or even 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.
Also think about the strength of your local housing market. If you buy a home and are forced to move, could you be stuck with an unsold or unrented property for an extended time? If you have a renter, would you be able to manage the property from afar, especially if you’re in a remote or distant location and working irregular hours? How much would a property manager charge? Do you understand the tax implications of renting your home? Take time to understand what you’re getting into.
VA Home Loans Have Advantages
Generally, 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% of the home’s purchase price.
— No pre-payment penalty.
— No minimum credit score (although the lender may have its own requirements).
These combined benefits can make it easier to get into a home and save you thousands over the life of a loan. Remember, though, just because it may be easier to get into a home doesn’t necessarily mean your housing costs will be lower than renting.
Weighing Your Options
Buying your first home is always a big decision, and even more complicated when you’re in the military. It can work but will require careful thought and contingency planning — both of which should be familiar to you given your military training. Ask around to see what others who have gone down this road think and have experienced. In the meantime, happy belated Veterans Day, and thank you for your service!
Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.” Read more at http://schwab.com/book. You can email Carrie at firstname.lastname@example.org. The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice.
COPYRIGHT 2021 CHARLES SCHWAB & CO., INC. MEMBER SIPC.
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