WASHINGTON — Ask any D.C.-area resident how much it costs to live in the nation’s capital, and you will most likely hear, “It isn’t cheap.”
The average rent for “class A” apartments in the city — the 14,500-plus units with luxury amenities — is $2,648, and the average rent for “class B” apartments, or those that are older and generally have fewer perks, is $1,917, The Washington Post reports.
And high rents are not a trend limited to Washington. According to a Zillow report, rent prices have increased throughout the nation 2.8 percent on a year-over-year basis.
Ross Kenneth Urken, personal finance editor for TheStreet.com, says a number of factors are responsible for the continual rise in rent prices — beginning with demand.
“Fewer customers out there are able to put down the down payment on a house because of the ripple effects of the recession,” says Urken, who says stagnant wages, uncertain job prospects and debilitating student loan debt make it more difficult for a generation of young professionals to save.
Residents are willing to pay $2,500 a month for an apartment because they are unwilling, or unable, to put 20 percent down for a house, he says.
But with more than one-third of renters spending more than 30 percent of their incomes on rent, alone, when does it become cheaper to buy, especially in a market experiencing above-normal rates of home value growth?
“The dream of the American homeowner has not died, and people say if you’re renting, you’re throwing your money away, and if you’re buying, then you’re investing in something that’s yours,” Urken says.
Step 1: The Down Payment
The primary hurdle for many first-time homebuyers is obtaining enough money for the down payment. While saving for a down payment, Urken recommends focusing on your credit score, in addition to growing your savings.
“If you have a higher credit score, you’re inevitably a more trustworthy buyer,” he says.
Having a high credit score also makes you a better candidate for qualifying for a lower down payment or lower interest rates, which Urken says, will “help you in the long-run if you go about paying off the mortgage.”
To improve your credit score, Urken recommends continually making on-time payments and taking on debts and repaying them quickly.
“You need to be able to demonstrate that you have the capacity to pay back your loans in a timely fashion, and that’s going to improve your profile to potential lenders,” he says.
Step 2: The Formula for Buying
For renters who are further along in savings and are on the cusp of buying, Urken recommends a test he calls the “Rule of 15.”
First, calculate the amount you pay annually in rent. For example, a renter who pays $1,800 a month for an apartment pays $21,600 a year for rent. Then, consider how much you might pay for a house (say $450,000). Then, divide the cost of the house by the cost of your annual rent payments. In this example, that would be $450,000 divided by $21,600, which equals 20.83.
Urken says if the number from that equation is 15 or less, buying is cheaper than renting. So in the example above, it is not necessarily cheaper to buy than rent. For someone who pays $1,800 a month for rent, however, buying a home that costs $300,000 is cheaper according to Urken’s test, since the result of the equation is 13.
“It is a formula that I’ve found to work when trying to compare whether to shell out money for a monthly mortgage with a down payment, or whether to go ahead and keep renting,” he says.
Those weighing the option of buying versus renting also should take advantage of today’s low-interest mortgage rates. Currently, interest rates are around 4 percent, compared to 4.51 percent last year, but Urken says these rates will most likely rise in the first quarter of 2015. Home prices, which Urken says are about 20 percent lower than the 2006 peak, are also expected to increase.
“Thinking sooner rather than later is definitely your best bet,” Urken says about buying.
But before you become a homeowner, Urken says it’s important to consider how long you plan to live in the home.
“It makes more sense to go ahead and buy a house if you know you’re going to be there for 10, 15, 30 years,” he says. “If you’re someone who wants the mobility and the job market to move around, take a position cross-country, obviously that’s something that should be factored in your decision to buy or not.”
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