Rent or Buy: What MilFams Need to Know
You've seen the headlines: The housing market is beginning to stabilize. Home prices in some cities are increasing, and much of the U.S. housing market is in recovery.
Buying a home is 45% cheaper than renting in all of America's 100 largest metro areas, according to Trulia, a company that provides housing-market analysis. In the Seattle-Tacoma region (within a stone's throw of Joint Base Lewis-McChord), for example, buying a house is 42% and 41% cheaper than renting, respectively.
So if your family receives PCS orders, you might figure it's a no-brainer to buy a house at your new duty station.
Not so fast.
According to a chorus of housing professionals, renting can be better for the budgets of military families who move often (nearly every military family, in other words). If you're only going to be in a home for three to four years, you have a strong possibility of finding yourself underwater on your mortgage or simply unable to sell when your next PCS orders arrive.
"Anytime that you think you're only going to live in a home for three or four years, it's probably not a good idea to buy, even under the most normal of real estate circumstances," says June Walbert, a CERTIFIED FINANCIAL PLANNER™ practitioner with USAA.
Why? When you are considering buying a house, you have to consider several factors. First you have to consider your personal financial situation, then the current health of the market, your tax bracket, and how long you plan to own the home you are considering buying.
The difference in projected savings can be substantial when any one circumstance is varied. For instance, in the Seattle area, if you get a 30-year mortgage at 3.5%, are in the 25% tax bracket, and plan to stay for seven years or more, your likely savings over renting will be 42%, or a hefty $715 per month, Trulia's Daisy Kong says. However, if you plan to stay only three years, your savings plunge to 16%, or $270 per month, says Kong.
And don't forget about the costs of selling your home: Real estate commissions and other fees can cost you 6% of the sale price. That's more than $10,000 on a $170,000 home -- which is a lot of cash to spend every three years (or less).
In Trulia's latest survey, Detroit came in at 70% cheaper to buy than to rent -- the biggest savings in the country. So an airman stationed at Selfridge Air National Guard Base near Detroit would be a fool not to buy a house, right?
Wrong, says Trulia's Kong. "Homes are really cheap there, but you shouldn't buy a home just because it's cheap. Given the costs of moving and the buying and selling process, if you're not staying in the house for at least seven years, you'll want to take into account your personal situation before you buy."
Of course, military families generally have access to VA loans, one of the only remaining zero-percent-down mortgage programs. This offers both opportunity and danger. If you buy a home with a small down payment and prices drop, you could easily find yourself underwater and have to bring a check to closing when you sell. Think of it as a delayed down payment.
"Plan for the eventuality that you may need to make one (a payment), even if it's an exit fee rather than a down payment," says Keith Gumbinger, vice president of HSH.com, the nation's largest publisher of mortgage and consumer loan information.
So before you buy, try a financial fire drill. "I'd encourage families considering buying to model out what would happen financially if they sold in three, five or seven years," says Jane Hodges, author of the new book "Rent vs. Own." "I like to call this the equity crunch test."
Military families receive the (tax-free!) Basic Allowance for Housing and other perks and tax breaks (tax-free combat pay, the military retirement system, the military Savings Deposit Program and so on). A family that saves diligently and whose service member gets out after their 20 years could find themselves in a position to do something most Americans can only dream of: Pay cash for a house.
|Personal Finances Home Ownership Renting a House|