Rent or Buy? FHA Loans and Home Ownership
When you rent, you are paying someone else for the privilege of living in their property and it is the property owner who reaps the benefit of those payments in the form of growing equity in the home.
What does that mean? When you want to buy a home with an FHA loan, a VA mortgage, a USDA loan, or a conventional one, you start with zero equity.
Your down payment reduces the amount of the loan compared to the current value of the property. The amount of money you have paid down on the loan creates equity.
That means that the longer you own the home and the lower your mortgage gets, the more equity you have built up in the house. When your mortgage is halfway paid for, you have 50% equity in the home.
Some will complain that the issue is more complicated than that. And they are right. Why? Because equity isn’t just about how much you have paid versus the original valuation of the property.
Let’s say you have built up that 50% equity in the home, but you are thinking about a refinance loan so the home gets appraised again in a much hotter real estate market than when the home was first appraised.
If the value in your home goes up significantly with the new appraisal, your equity also rises. That is because equity is about the market value of the home at appraisal time--it is not stuck in the past with the original appraisal.
So we see that buying a home is an investment that can grow and become more profitable over time.
There are potential downsides, of course, the same forces that can increase your equity in the home can also take it away--if house prices fall sharply and the overall value of the home decreases, your equity potentially gets smaller, too.
Owning a home versus renting one--a conundrum many face and decide to own instead of rent. If you are considering becoming a homeowner, talk to a loan officer and ask about the most realistic amount of preparation, planning, and saving time you need to be fully prepared.
Home loans are a major investment, but this milestone is not unattainable. With the right planning and saving you can achieve your goals to own and stop paying a landlord. If you are not comfortable approaching a lender in the earliest stages of your homeownership journey, remember that you can always contact the FHA at their toll-free number (1-800 CALL FHA) to request a referral to a local, HUD-approved housing counselor who can help you with advice and information.
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