Homeownership

Buy vs rent: the real math

Renting isn't "throwing money away" — you're buying flexibility and avoiding maintenance, taxes, insurance, and transaction costs. Buying wins when you stay put long enough for appreciation + principal paydown to beat those costs.

• The 5% rule (rough): unrecoverable costs of owning ≈ 5% of the home's value per year (property tax ~1–2%, maintenance ~1%, insurance, plus mortgage interest and opportunity cost of the down payment). If annual rent is well below 5% of the purchase price, renting is often cheaper; well above, buying usually wins.
• Break-even horizon: typically 5–7 years after closing costs (2–5% to buy, 6–10% to sell). Planning to move in 3 years? Rent.
• Run your numbers in the NYT-style rent-vs-buy framework: compare total monthly ownership cost (PITI + maintenance + HOA − principal portion) against rent, and invest the difference if you rent.
• Non-math factors: stability for kids, control over your space, and forced savings are real benefits — just don't let them justify a house you can't afford.

How much house can you afford?

• 28/36 rule: housing costs (PITI + HOA) ≤ 28% of gross monthly income; all debts ≤ 36%. Lenders may stretch to 43–45% DTI — you shouldn't.
• Think in monthly payment, not price: at 7% rates, every $100k borrowed costs ~$665/month in principal & interest alone. Taxes and insurance add hundreds more.
• Keep a cushion: after down payment + closing, retain your full emergency fund plus a home repair buffer. The furnace doesn't care about your timeline.
• Don't buy at max pre-approval. Pre-approvals measure what the bank risks, not what your life affords.

Mortgage types

Down payment, PMI & points

• 20% is ideal, not required. 3–5% gets you in with conventional or FHA. The tradeoff: PMI ($100–300/month typically) + higher payment.
• PMI removal: request cancellation at 20% equity (based on current appraised value — a new appraisal after appreciation can get you there faster); it auto-terminates at 78% of the original value.
• Points: 1 point = 1% of the loan paid upfront to lower the rate (~0.25%). Worth it only if you keep the loan past the break-even — divide the cost by monthly savings. Staying 4 years with a 6-year break-even? Skip the points.
• Down payment assistance: every state has first-time buyer programs (grants, forgivable loans). Search your state's housing finance agency — free money is common and underused.

The buying process, in order

1. Credit & budget: 6–12 months out, optimize your score (see Foundations), save down payment + closing (2–5%) + reserves.
2. Pre-approval (not just pre-qualification): lender verifies income/assets/credit. Don't open new credit or make big purchases after this.
3. House hunt with a buyer's agent: interview 2–3; in most markets the seller pays the commission — confirm in writing.
4. Offer with protections: inspection, appraisal, and financing contingencies. In hot markets people waive these — understand you're gambling before you do.
5. Inspection: $300–600 that finds the $15,000 foundation crack. Non-negotiable unless you're a contractor.
6. Appraisal & underwriting: the lender confirms value and re-verifies everything. Stay boring financially until closing.
7. Closing: review the Closing Disclosure 3 days prior; bring cashier's check; verify wire instructions by phone — wire fraud is rampant.

Refinancing: when it pays

• The 1% guideline: refi typically makes sense when you can drop your rate ~0.75–1%+ and you'll stay past the break-even (closing costs ÷ monthly savings).
• Refi types: rate-and-term (lower payment), cash-out (higher rate, restarts equity — use cautiously), streamline (FHA/VA, minimal paperwork).
• Don't reset the clock blindly: refinancing a 25-years-remaining loan into a new 30-year lowers payments but can cost more total interest. Ask for a custom term (e.g., 25-year) to match.
• Recast alternative: big lump sum toward principal? A recast ($250–500 fee) re-amortizes your existing loan to a lower payment — no refi needed.

Selling smart

• Capital gains exclusion: $250k single / $500k joint of profit tax-free on a primary residence (owned + lived in 2 of last 5 years). One of the best tax breaks in the code.
• Total selling costs run 6–10%: agent commissions (negotiable — interview and compare), transfer taxes, staging, repairs. Price it into your buy-vs-rent horizon math.
• Timing: spring lists best in most markets, but pricing right beats timing perfectly. Overpricing and chasing the market down costs more than listing 2% under from day one.

FAQs