MONEY Ask the Expert

Here’s the Right Amount to Spend On a Home Renovation

For Sale sign illustration
Robert A. Di Ieso, Jr.

Q: When remodeling my house, I don’t want to spend a lot of money on updates that don’t actually increase my home value. How do I know how much is a smart amount amount to invest, and when I would be going overboard?

A: Jump into a renovation project without first setting a budget and you may spend loads of cash on all sorts of lovely options—from a marble island-top for your kitchen to a two-person hot tub for your new patio—that you won’t get paid back for if you sell your house in a few years.

While that may not be a concern if you’re staying put for the long haul, if you’re likely to move in 10 years or less, it pays to limit your spending to what you might reasonably hope to get back at resale.

Thus start with renovating only spaces that are functionally obsolete, says Omaha, Nebraska, appraiser John Bredemeyer, a spokesman for the Appraisal Institute, a trade association. “Changing out a perfectly good, 10-year-old kitchen, for example, just because you don’t like the previous owner’s style choices, is not an investment that will pay you back at resale,” he says. But if that kitchen is from the 1940s, 1960s, or even the 1970s, a well-budgeted renovation makes financial sense.

How much should you invest? Bredemeyer’s rule of thumb is to spend no more on each room than the value of that room as a percentage of your overall house value (you can find an approximate value of your home at zillow.com).

Here’s how the percentages break down for each room:

Kitchen: 10% to 15% of house’s value

Kitchen renovation budget for a:

$300,000 house: $30,000 to $45,000

$500,000 house: $50,000 to $75,000

$750,000 house: $75,000 to $112,500
Master Bathroom Suite: 10% of house’s value

Master bathroom suite renovation budget for a:

$300,000 house: $30,000

$500,000 house: $50,000

$750,000 house: $75,000

 

Powder Room/Bathroom: 5% of house’s value

Powder room/bathroom renovation budget for a:

$300,000 house: $15,000

$500,000 house: $25,000

$750,000 house: $37,500

 

Finished Attic or Basement: 10% to 15% of house’s value

Attic or basement finishing budget for a:

$300,000 house: $30,000 to $45,000

$500,000 house: $50,000 to $75,000

$750,000 house: $75,000 to $112,500

 

Other Rooms: 1% to 3% of house’s value

Living room, dining room, or bedroom renovation budget for a:

$300,000 house: $3,000 to $9,000

$500,000 house: $5,000 to $15,000

$750,000 house: $7,500 to $22,500

 

Patio, Deck, Paths, and Plantings: 2% to 5% of house’s value

$300,000 house: $6,000 to $15,000

$500,000 house: $10,000 to $25,000

$750,000 house: $15,000 to $37,500

 

Got a question for Josh? We’d love to hear it. Please send submissions to realestate@moneymail.com.

MONEY homeowners insurance

Why You Soon May Have to Pick Up More Home Repair Costs

measuring tape with money
Bart Sadowski—Getty Images

Insurers are moving from flat deductibles to higher ones based on the value of your home. Here's what you need to know about this change.

Two years after Superstorm Sandy, State Farm agent Jen Dunn is busy explaining new insurance math to her customers in upstate New York. Instead of the dollar-amount deductibles they have been used to for years, she is now writing their policies based on percentages.

For many, it means turning the typical $500 deductible into 1% of the insured value—for a $250,000 house, that means a gasp-producing $2,500.

“My clients who have been offered this initially say, ‘I don’t like this,'” Dunn says. But then she explains that the higher amount is usually offset by a lower annual premium. If they go years without a claim, they can save in the meantime.

Jason Corbett, 39, who lives in central Georgia, is using a 1% deductible. Because Corbett’s rural home is valued at slightly less than $200,000, it was a better deal than a flat $1,000 deductible. The difference between the two deductibles was only a couple of hundred dollars. However, he saved money by lowering his premium, so over time the difference in his out-of-pocket costs will be negligible.

If he had a $300,000 home and the deductible was double what he pays now, “that would be a different decision,” says Corbett, who writes a personal finance blog.

State Farm, the largest U.S. property and casualty insurance company by market share, says a “significant” number of its policies now have percentage deductibles. Other carriers, like Allstate Corp, USAA, and Nationwide, also offer the option to consumers in certain states, but the prevalence is not yet tracked nationwide. The practice is near-universal in Texas at this point, according to that state’s insurance office.

With a percentage deductible policy, things are a little different than the old-fashioned flat rate. Here are seven things you need to know:

1. Do not be afraid of high deductibles

You might be used to $500, but a higher deductible could actually be better for you.

“It’s a very smart move to buy high deductibles if you can afford it,” advises J. Robert Hunter, director of insurance for the Consumer Federation of America.

The main reason? Every claim you make against your homeowners insurance can raise your rates. One claim pushes it up an average of 9% and two claims will raise it by 20%, according to a recent study by insuranceQuotes.com. So you want to pay out of pocket for small claims anyway.

2. The 1% deductible is not a percentage of your loss

The new terminology makes people think of health insurance, but homeowner claims do not work that way, says Jim Gavin, director of insurance information services for the Independent Insurance Agents of Texas trade group.

Rather, the out-of-pocket deductible you have to pay before the company will cover any claims is based on a percentage of the insured value of your home—which is not the market value or the appraised value, but the cost of replacing your home should it burn to the ground and need to be rebuilt.

For example: If a kitchen fire damaged your $250,000 home with a 1% deductible, and it cost $5,000 to repair the damage, you would receive a check from the insurance company for $2,500 after paying the other half yourself.

3. Your out-of-pocket costs will regularly increase

Your $500 deductible stays flat forever, but a percentage deductible will go up incrementally over time as the insured value of your home rises.

Some homeowners may not even notice this, like Will Harvey, 34, of Tyler, Texas, who is five years into a 1% policy on his home. “If it went up, it wasn’t enough for me to remember it,” he says.

4. You will still have other deductibles on top of the basic rate

Many homeowners have add-on clauses like a 5% hurricane deductible that is common in coastal areas, or 2% for wind and hail damage. Many states require separate coverage for earthquakes and floods.

Those all still apply on top of the basic coverage for fire and theft, says Amy Danise, editorial director of Insure.com. So if you have any damage that is caused by a specified risk, you will have to pay out of pocket first for that.

5. Your might be able to pay down your percentile

If 1% is too much for you, you may have the option to accept a higher premium to lower out-of-pocket costs—going from 1% to half a percent or some other fraction. The value to you depends on how much your house is worth and how much you can afford to pay out of your savings if something goes wrong, says State Farm’s Dunn.

6. You can still shop around

Even in Texas, where almost every company offers a deductible of at least 1%, or sometimes up to 1.5% or 2%, some carriers still do things the traditional way. Texas insurance agent Criss Sudduth says the customers who might benefit more from a flat-fee policy are those whose premiums do not actually go down despite the percentage policy—either because the weather risks are too high or because their personal credit is bad.

7. You should still figure out your dollar amount

After years of hearing complaints from consumers who are confused, the Texas legislature passed a bill recently requiring carriers to explain what the percentage deductible translates into, in dollars.

In other states, if your carrier does not do this, you should find out the information yourself and write it on your declarations page, says Deeia Beck, public counsel and executive director of the Texas Office of Public Insurance Counsel.

MONEY home improvement

$336 Made This Blah Bathroom Awesome

A budget remodel turned this bleak bathroom into an attractive cottage-style space. Here's how the homeowners pulled it off.

Nothing’s more boring than basic beige. While the master bath at Meredith and Stephen Heard’s ranch house, in Fayetteville, Arkansas, was perfectly functional, it was a bleak blank box of washed-out finishes. To give it some oomph, Stephen created a high-contrast look on the walls with white-painted board-and-batten wainscot made from low-cost lath and furring strips; above it, Meredith used a dark gray paint to add depth.

The vanity was in great shape, so Stephen just replaced the cultured-marble top with stained and sealed butcher block and, to create more deck space, put in a vessel sink. Meredith updated the cabinet doors with white paint and satin-nickel pulls left over from their kitchen remodel. To brighten the space, Stephen replaced the old strip vanity light with a three-shade fixture and the standard overhead flush-mount with a drum-shade pendant. Finally, Meredith added a sunny shower curtain she made herself. Having banished the bland, she says, “It’s so much more welcoming now—we feel like we really gave the room some personality.”

The Project Tally

• Tacked up lath and furring strips, board-and-batten style, using a nail gun; filled knots, sanded, and caulked; then sealed it all with leftover primer and paint $26
• Painted the walls a dark gray, custom mixed at the store from paint they had on hand $0
• Freshened the vanity with leftover paint and pulls $0
• Topped the vanity with a new butcher-block counter, vessel sink, and faucet from a big-box store $170

For the full tally, click here for the original article from This Old House.

Read next: The Secret to Getting a Ridiculously Cheap Thanksgiving Flight

MONEY home financing

It Could Soon Be Easier to Get a Mortgage

Fannie Mae headquarters in Washington, DC
Kevin Lamarque—Reuters

The nation's largest mortgage firms plan to once again buy loans where the borrowers put as little as 3% down.

Perhaps you thought the days of putting little money down for a home were gone. Well, not so fast. On Monday the CEO of Fannie Mae, Timothy Mayopoulos, announced that the housing giant planned to once again buy loans for which the borrowers put as little as 3% down. Mayopoulos told the crowd gathered at the Mortgage Bankers Association conference in Las Vegas that Fannie, which along with Freddie Mac supports the bulk of the mortgage market today, is working to finalize the details of the offering and gain regulatory approval to proceed. “We want this business,” he said.

So far no details have been announced about what income or credit score requirements borrowers making such small down payments will need to meet the group’s standards. Mayopoulos said more information would be released in the coming weeks. Both Fannie and Freddie previously purchased loans with 3% down but had stopped in recent years. Today the firms usually require at least a 5% down payment on most loans.

Melvin Watt, director of the Federal Housing Finance Authority, which regulates the two government enterprises, said his group was working with them to develop “sensible and responsible guidelines” for the 3% loans, in an effort “to increase access for creditworthy but lower-wealth borrowers.” He cited “compensating factors” in evaluating such borrowers, though he didn’t say what those factors would be.

A 3% down payment is not exactly nonexistent today. The Federal Housing Administration has been offering mortgages with as little as 3.5% down for years. Traditionally, most borrowers were lower income, and the amount they could borrow was capped, but today even higher income folks use FHA loans to buy homes in expensive areas (loan limits vary by state but typically top out at $625,500). In recent years, these mortgages—which come with higher fees than traditional loans, as well as pricey mortgage insurance—have accounted for a larger than normal share of the market.

Now Fannie seems intent to grab some of that business. The low-down-payment loan, Mayopoulos promised, “will also be competitively priced, including against FHA execution.”

In a related move, FHFA’s Watt also announced that the agency is working to provide more details on when the housing giants can force a lender to buy back a loan that goes bad, which he hopes will encourage banks to loosen their lending standards. Over the past few years Fannie and Freddie have required lenders to buy back millions of dollars of bad loans, “sometimes for seemingly minor issues, such as missing a piece of paperwork,” said Keith Gumbinger, vice president at mortgage information publisher HSH.com.

“This clarification might allow lenders to look at riskier borrowers with less fear of having to buy these loans back in the future,” he said. He noted, though, that any changes are likely to be incremental: “It might let a few more borrowers in at the margin, but it won’t be like flipping a light switch where FICO scores down to 640 are now in.”

It’s important to note that Fannie and Freddie can’t force banks to lower their lending standards. In fact, most banks today require tougher standards than the government agencies impose, partially because they are fearful of having to buy back loans that go bad. For example, Fannie and Freddie will buy loans with FICO scores as low as 620, but most banks require at least a 660 or 680, Gumbinger said.

Similarly, lenders could always decide not to offer 3% down loans, even though Fannie and Freddie have agreed to eventually start buying them again. So it remains to be seen whether and how much the rule changes, when they are formally announced in the next few weeks, will ease the way for borrowers.

Read More About Getting a Mortgage in Money101:
How Much House Can I Afford?
What Mortgage Is Right for Me?
How Do I Get the Best Rate on a Mortgage?

MONEY Ask the Expert

Here’s How to Make Leaf Clean Up Easy This Fall

For Sale sign illustration
Robert A. Di Ieso, Jr.

Q: I’m debating whether to invest in some high-quality equipment to help pick up the leaves in our yard this fall, or hire a pro to tackle the job. How much would I need to spend on tools if I go the DIY route?

A: The problem with hiring a landscaper to do your fall leaf cleanup isn’t necessarily the $250 to $500-plus price tag, it’s that this is not a once-a-season job. In many regions of the country, autumn lasts weeks and weeks, so it takes a handful of cleanups to keep your property neat and tidy. (This is especially true if you have a neighbor who waits until absolutely every branch is bare before he’ll lift a rake, ensuring that his leaves continue to blow onto your lawn until the first frost glues them to the ground.)

The good news is that do-it-yourself leaf removal doesn’t have to be a blister-raising, hamstring-stressing effort. With the right tools, the leaves can be gone before the first afternoon football game kicks off. Here’s what you need to make that happen.

Lawnmower: Throughout the spring and summer, setting the mower to maximum height is one of the best things you can do for your lawn’s health. But come fall, drop it down as low as it’ll go without scalping the turf. Short grass gives leaves less to get caught on as they drift around the neighborhood. It also means the mower will vaporize any leaves that have already fallen (assuming a light coating). Use a mulching mower—meaning the kind without a bag that pulverizes clippings and drops them back into the turf to feed it—such as the Toro 20370 ($309 at Home Depot).

Leaf Blower: Raking is hard work, but so is using a wimpy hand-held leaf blower. The typical plug-in version isn’t powerful enough to extinguish a birthday candle, never mind move a pile of damp leaves—or a single well-nestled acorn. If you’re of strong enough body to rake, you’re probably of strong enough body to handle a gas-powered backpack blower, such as Husqvarna’s top-of-the-line 356BT ($439 at amazon.com). These machines have flexible hoses and variable speed triggers, so you have plenty of power to remove those leaves stuck in your azaleas and also a gentle enough touch for cleaning up around a screen porch without sending dirt inside. (Just please wear ear protection, because even this quieter-than-most version is quite loud.)

Tarp: Don’t try to transport a big pile of leaves all the way to the woods for disposal- or the curb if your municipality picks them up with a vacuum truck— using a blower, not even a backpack one. Instead, rake or blow them onto a tarp and drag them to their destination or, better yet, blow them onto the EZ Leaf Hauler, $40 from plowhearth.com, which has three sidewalls to help corral and relocate large piles.

Bagger: If you need to pack your leaves into brown paper bags for municipal curb pickup, check out the Leaf Chute ($9 at Lowe’s or Home Depot). It’s a low-tech, three-sided plastic tube that props open the empty bag and has a wide mouth for easy loading. Once the bag is full enough to stand on its own, remove the chute and pack in as many more leaves as you can stamp down.

Your Kids: Leaf pickup is an ideal chore for the young people who are eating you out of house and home. Start them with rakes—and quality, well-fitted work gloves—and let them learn the old fashioned way. Then, once they’re capable rakers, understand the basics of the job, and are ready for power tools, let them grab a hold of that sweet new blower.

 

Got a question for Josh? We’d love to hear it. Please send submissions to realestate@moneymail.com.

MONEY Rentals

The Money Mistake That 48% of Renters Make

List of bills to pay, with "paid" written in red on top
David Gould—Getty Images

They assume their on-time payments will help boost their credit score, according to a new TransUnion survey.

Most Americans know that a good credit score can open the door to lower cost loans for big adult milestones, such as buying a home or car.

Yet it turns out that many renters are misinformed about what goes into that somewhat mysterious three-digit number: Nearly half of renters ages 18 to 64 think rental payments to their landlords are automatically reported to the credit bureaus, according to survey results released last week by TransUnion, one of the nation’s three major credit reporting agencies. The survey also revealed that more than half of renters believe payments for cable and internet, utility and cellphone bills are regularly reported to the bureaus.

Credit agency firms TransUnion and Experian did recently start allowing rental payments to be collected and factored into credit reports. But in practice, most landlords do not yet share with the data collectors that you’re paying on time each month, says Ken Chaplin, senior vice president of TransUnion’s consumer division. Cable, internet, utility and cell providers also typically do not, he says.

Even if your landlord or service firm is one of the few that does report, the payments may not be included in the most common credit score lenders use, called the FICO score. So if you were counting on your on-time monthly rent checks to help you build your credit score, you’re out of luck.

Keep in mind that although being conscientious on paying your rent and utilities won’t help you, your failure to make a payment can hurt you. Some landlords and utility companies do report delinquent customers—not to mention the fact that your accounts could end up in collections. So this isn’t an excuse to stop paying these bills.

Instead it should serve as a wake up call that you may need to work in other ways to improve your credit score, such as paying car loans, student loans and credit card bills on time each month.

Related:

What is a credit report and when is it used?

How is my credit score calculated and how can I improve it?

MONEY home improvement

What Are Some Easy Fixes That Can Boost My Home’s Value?

HGTV's Scott McGillivray shares his tips for simple renovations that will make your home more attractive to a buyer.

MONEY mortgages

Here’s How Long It Will Take to Get a Mortgage

141020_REA_TimeMortgage
Dougal Waters—Getty Images

Banks are asking for a lot of documents these days, so don't assume the process will be speedy.

You’re scrolling the online listings, looking for houses, when — boom — the love of your real estate life pops out from the page. You’ve found the perfect home, with the best imaginable location, layout, size, finishes, and price. You’re ready to buy.

Just one problem: You haven’t started looking for a loan yet. And the seller will only accept offers from pre-approved buyers. Unfortunately, you won’t be able to make that happen by tomorrow.

Getting a loan, even a pre-approval, doesn’t happen overnight. There are key hoops you must jump through. How long should a borrower expect each step to take? And why must you start before you begin your hunt, especially in a competitive market? Let’s take a look.

Step 1: Comparison shopping for loans.

It’s unlikely you would buy a car, piece of furniture, or appliance without shopping around. You definitely shouldn’t take on a 30-year loan without some serious research.

Search for mortgage providers online, and visit a local bank or credit union. Schedule a meeting with a mortgage loan officer, who will pull your credit (more on that below) and give you a reasonable estimate of the interest rate, closing costs and terms you can expect. Then expand your search to other financial institutions, including community banks or other credit unions, or continue looking online, and compare the terms you’re offered from each bank.

Although each lender will look up your credit information, you don’t need to worry every inquiry will hurt your credit score. The Fair Isaac Corporation, or FICO, allows people to “rate-shop” for a mortgage without dinging their credit scores, as long as you do all of your shopping within a 14-day window. Abide by that timeline and the credit bureaus will regard that first credit pull as a “ding” but ignore the subsequent ones.

Helpful tip: When comparing lenders, pay attention to the annual percentage rate (APR), not just the interest rate. The APR covers the “total cost” of borrowing, including loan origination fees and other ancillary costs.

Total Time: 14 days.

Step 2: Get a pre-qualification letter.

Most buyers will require your pre-qualification letter before they’ll even consider your offer — but don’t worry, this step is quick and easy.

Ask any of the lenders with whom you spoke to during your mortgage shopping spree for a pre-qualification letter. These are relatively easy to get and simply give a rough, unverified estimate of the loan size you may qualify to receive. Most lenders will give you a pre-qualification based on your verbal self-reporting of your income, assets, debts, and down payment size.

Helpful tip: You don’t need to take out a loan from the same lender that gave you your pre-qualification letter.

Total Time: one to three days (overlapping with the timeframe for the first step)

Step 3: Get pre-approved.

The pre-approval stage is when lenders verify everything you’ve told them. You’ll need to supply identification documents such as your Social Security card, proof of income, assets, and employment, as well as records of any debts you hold. The lender will pull a credit report.

If you have a simple situation, such as stable employment with no debt, this process can be as short as one to two weeks. If you’re self-employed, own several other houses, have had a previous divorce or bankruptcy, have a pending court case or lawsuit against you, are in the U.S. on a temporary visa, or have other complicating factors, the loan officer may require additional documentation, which can extend the process several weeks or months.

Once you’re pre-approved, you’ll receive a conditional letter stating the exact amount of loan for which you’re approved.

Helpful tip: All else being equal, sellers often prefer to work with buyers who have pre-approval letters, rather than pre-qualification letters, particularly in a competitive market where homes get multiple bids.

Total Time: one week to several months

Step 4: Final loan approval.

Armed with your pre-approval letter, you make an offer on your dream home and it’s accepted. (Hooray!) Next, you’ll need the lender to conduct an appraisal.

In this instance, an appraisal is official verification that you’re buying the home at a reasonable market value. It protects the lender from the risk of loaning an unreasonable sum, such as $300,000 on a house that should be valued at $220,000.

Scheduling a time for a licensed appraiser to visit the property is frequently the longest part, and may take up to two weeks (depending on availability in your area, as well as the flexibility of the seller). Once the appraiser makes a home visit, the approval (or rejection) comes through within a day or two.

Time: three days to two or more weeks

The good news? Now that you’ve passed the appraisal process, you’re ready to close on this loan — and this house. Enjoy the moment, before you have to start packing.

 

To read more from Paula Pant of Trulia, click here.

 

Related:

How do I get the best rate on a mortgage?

Which mortgage is right for me?

MONEY buying a home

When You’re Better Off Renting A Home Than Buying One

141017_REA_RentingOverBuying
Phoenix, Arizona. Dennis MacDonald—Alamy

Today it typically costs less to buy a place than rent one, but exceptions exist. Your situation may be one of them.

It remains cheaper to buy than rent in every one of the country’s 100 largest metro areas, according to new Trulia research. In fact, homeownership nationwide has actually become a sweeter deal, coming in on average 38% cheaper than renting today, compared with 35% one year ago, thanks to falling mortgage rates and rents rising faster than prices.

Just how much cheaper it is to buy than rent varies by area, coming in at 17% cheaper in Honolulu and 63% in Detroit (find the data for all 100 metro areas here). But those figures were calculated assuming the buyer used a traditional 30-year fixed rate mortgage with a 20% down payment. Yet there may be good reasons for financing a home purchase other ways, particularly if you’re a first-time buyer without savings or equity from another home. Or maybe you want to pay all cash in hopes of beating out other bidders in a competitive environment. Are you still better off in most cities buying than renting if you use these non-traditional payment options?

The Pros and Cons of Different Types of Mortgages

Let’s look at how the different payment options play out for a $250,000 home that the owner sells after seven years. To keep things simple, let’s start out ignoring closing costs, home price appreciation, tax benefits, and many other things we do account for when we add these scenarios to our full Rent Versus Buy model, below.

  1. A traditional 20% down, 30-year fixed-rate loan on a $250,000 home would carry a $990 monthly mortgage payment, including principal and interest. After seven years, the unpaid loan balance is $173,291, leaving equity of $76,709.
  2. All cash is just what it sounds like. You pay $250,000 upfront and that’s all equity at the end.
  3. For a 15-year fixed-rate loan, you still put 20% down. The average mortgage rate on a 15-year fixed-rate loan is almost a full point below that of the 30-year fixed rate. But the shorter term means a higher monthly payment of $1,428. The payoff is that the 15-year loan builds equity much faster: $130,507 after seven years.
  4. A 10% down payment loan with private mortgage insurance requires less money upfront. But the higher initial loan balance means a larger monthly payment plus a mortgage insurance premium of $133 per month. Furthermore, the lower down payment and higher loan balance leave equity of only $55,048 after seven years.
  5. A 3.5% Federal Housing Administration (FHA) loan calls for a down payment of only $8,750 but requires upfront and ongoing mortgage insurance premiums. The higher initial loan balance means equity of just $38,748 after seven years. That’s about half what you’d have with a traditional 20% down, 30-year loan.
Understanding the Financing Options
For a $250,000 home Traditional 20% down, 30-year fixed All cash 15-year fixed, 20% down 10% down, private mortgage insurance 3.5% down FHA
Down payment $50,000 $250,000 $50,000 $25,000 $8,750
Monthly payment (incl. mortgage insurance) $990 - $1,428 $1,247 $1,441
Equity at 7 years (no appreciation) $76,709 $250,000 $130,507 $55,048 $38,748
Note: Monthly payment is principal, interest, and mortgage insurance premium. Mortgage rates for the traditional 20% down 30-year fixed (4.30%), 15-year fixed (3.48%), and FHA (4.00%) loans are from the Mortgage Bankers Association for the week ending October 3. We use the same rate for a 10% down payment loan as the traditional 20% down payment rate, based on current rate quotes. Monthly payment includes mortgage insurance calculated for the first year of the loan. For FHA loans, the insurance premium falls over time but remains on the loan; the FHA upfront premium is rolled into the loan balance. For the 10% down loan, we assume insurance gets taken off when equity reaches 20%. All dollar amounts are rounded to the nearest dollar.

When deciding whether buying still beats renting with each of these financing options, the math gets complicated. For starters, the benefits of each option depend on how you would invest your money if you weren’t buying a home – that’s the “opportunity cost.” In addition, other factors, such as whether you itemize your tax deductions, also affect the relative benefits. Our Rent Versus Buy model factors all this in. So let’s see the results.

When Buying Is an Even Better Deal – And a Bad Idea

Remember that buying is 38% cheaper than renting nationally under our baseline model of a 20% down payment 30-year loan, tax deductions at 25%, and staying in the home seven years. Under all five of these non-traditional financing options, buying still beats renting. The gap is widest for the 15-year loan, where it’s 43% cheaper to buy. It’s narrowest for the 3.5% FHA loan, where buying is 25% cheaper.

mortgage type graphic

 

The 15-year loan ends up costing the least versus renting thanks to faster equity build-up and more of the mortgage payment going to principal rather than interest. Surprisingly, all-cash is a worse deal than a traditional 20% down, 30-year mortgage, although that hinges on our assumption about what you could earn if you didn’t tie up your money in an all-cash payment. (Geeks: we’re assuming a 3.5% nominal discount rate.) In addition, if you pay all cash, you lose the tax benefit of deducting mortgage interest. If you assume tax deductions aren’t itemized, there’s no tax benefit of getting a mortgage, which makes all-cash a better deal than a traditional 20% down, 30-year fixed rate mortgage.

The biggest shift is with the 3.5% down FHA loan, which makes buying only 25% cheaper than renting. In one of the 100 largest metros, Honolulu, buying with a 3.5% FHA loan is actually more expensive than renting. And, with this loan, buying beats renting only by 10% or less in San Francisco, New York, Los Angeles, and several other California metros.

Going further, it’s not hard to come up with realistic scenarios where buying costs more than renting in many local markets. For a millennial with little savings and no Bank of Mom and Dad, an FHA loan might be the only option. If our hypothetical twentysomething is not in a tax bracket that makes itemizing worthwhile and only stays put five years (those young people are restless), buying ends up costing more than renting in 27 of the 100 largest metros. Those 27 include not only pricey coastal markets, but also in markets like Phoenix, Las Vegas, and Colorado Springs. On the expensive coasts, it’s not even close. For instance, in this scenario, buying costs 30% more than renting in Orange County. Thus while an FHA loan might be within reach for many first-timers, in many costly parts of the country, it doesn’t make buying cheaper than renting. Our interactive map shows this for all the 100 largest metros:

 

blogpost map no 2

So, to buy or to rent? Falling mortgage rates and rising rents mean that buying looks even better versus renting than one year ago, especially in California. But buying is not for everyone. If you live in a market that’s a close call, and you plan to stay less than seven years, don’t itemize your tax deductions, or need an FHA loan, buying might not be the clear-cut winner, and could end up costing far more than renting.

 

To see the full post, including rent vs. buy figures for the 100 largest metros as well as methodology details, click here.

To read more from Jed Kolko of Trulia, click here.

Related:

MONEY 101: Should I rent or buy?

MONEY 101: What mortgage is right for me?

MONEY buying a home

Why Firemen Are More Likely to Own a Home than Economists

Firefighters
Many public service workers such as firemen own their homes. Michael Dwyer—Alamy

A new study shows which professions are most- and least- likely to be homeowners. The results may surprise you.

What do firemen, police officers, and farmers have in common? They’re all more likely to own homes today than economists, jewelers, and accountants.

These are the results from a newly released study, done by Ancestry.com, looking at the relationship between profession and home ownership today and over time. The website teamed up with the University of Minnesota Population Center to analyze Census data between 1900 and 2012, creating a century-spanning log to show how ownership changed over the decades.

Looking at the most recent 2012 data, the research found that 79% of policemen and detectives own a home, yet only 64% of economists do. Farmers (81%) and firemen (84%) are in the top ten professions most likely to own a house, ranked above jobs like accountants (76%), and far higher than members of the armed forces (33%). Nationwide, the data shows 64% of the population owns their home.

Another surprising finding: the stereotype of the starving artist isn’t necessarily reflected in the data—at least for some industries. It turns out 63% percent of artists and art teachers own homes, as well as 62% of musicians and music teachers, 63% of authors, and 57% of entertainers. It’s not all roses for the artistic class, though. Just 37% of actors and actresses own a house, and that number sinks to 23% for dancers and dance teachers.

Toddy Godfrey, a senior executive at Ancestry.com, points out that there are both high and lower income professions on the most-likely-to own list, suggesting there isn’t a direct relationship between high wages and ownership. Typically lucrative professions like optometry tend to own, but so do lower-paid trade and public service workers.

“You look at some of the jobs on the top of the list, and they’re clientele based, or teachers, or others who are community rooted,” says Godfrey. He speculates that professions most likely to own “have a long-term connection to the community they live in.” That reasoning may also explain why tradesmen tend to buy instead of rent. Godfrey guesses many of these workers are tied to regional manufacturing, and therefore are more likely to set down roots.

Another trend the data suggests is that temporary and highly mobile workers tend to avoid homeownership. That could explain why so few military service members own houses, as they can be redeployed elsewhere and may choose to move once their service ends.

Finally, Godfrey highlights the fact that while ownership took a hit in the bust, the majority of Americans own their home. That’s up from 32% in 1900, though most of the growth happened pre-1960. “Maybe it’s come down a point in the last few years, but it’s held pretty steady at two thirds,” says Godfrey.That trend has been pretty constant.”

Top 10 Professions for Home Ownership in 2012

1. Optometrists: 90%

2. Toolmakers and Die Makers/Setters: 88%

3. Dentists: 87%

4. Power Station Operators: 87%

5. Forgemen and Hammermen: 84%

6. Inspectors: 84%

7. Firemen: 84%

8. Locomotive Engineers: 84%

9. Airplane Pilots and Navigators: 83%

10. Farmers: 81%

Bottom 10 Professions for Home Ownership in 2012

1. Dancers and Dance Teachers: 23%

2. Motion Picture Projectionists: 27%

3. Waiters and Waitresses: 27%

4. Counter and Fountain Workers: 28%

5. Members of the Armed Forces: 33%

6. Service Workers (except private households): 34%

7. Bartenders: 35%

8. Housekeepers and Cleaners: 35%

9. Cashiers: 36%

10. Cooks (except private households): 36%

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