Can you afford to buy a home in Denver right now? For many, it’s not an easy decision making the leap from renting to owning.
In August 2020, the average sold price for a single-family house was $606,330, and the median sold price was $510,000, according to the Denver Metro Association of Realtors’ September Market Trends Report. For a condo, the average was $377,664 and the median was $325,000. Based on the median prices, single family homes sold for a little over 12 percent year-over-year from August 2019 to present. When prices are high and climbing higher, renting might seem like the obvious, more budget-friendly choice.
But buying might be easier than you think, and the choice to rent or buy is about more than just finances. Consider the following questions if you’re weighing this decision.
Can I Afford a House in Denver?
Let’s say you want to buy a house priced at $510,000. Did you know you don’t need 20 percent down these days to get a loan? With 10 percent down and good to excellent credit, you may qualify for a low-interest rate, low-cost mortgage. A 30-year, fixed-rate loan at 3 percent would give you a monthly principal and interest payment of $1,935. Keep in mind, you’ll also need money for homeowners insurance, property taxes, and budget for regular maintenance for your new home. You may need to come up with about 1 percent of the purchase price for closing costs in addition to your down payment, or you may be able to roll the closing costs into your loan, which increases your loan costs slightly.
If a 10 percent down payment isn’t doable and you want to buy soon, there are ways to get a home with a lower down payment. You could get an FHA loan with 3.5 percent down or a conventional loan with 3% or 5% down. In either case, you’ll be required to pay mortgage insurance premiums. Your monthly payment will be higher in this scenario since you’re borrowing more and paying those premiums. However, you will also get a break on your taxes and be building equity over time.
(Be aware that many lenders have tightened up their lending practices since the pandemic. While interest rates remain low, greater emphasis has been placed on your credit score and employment history).
Are My Finances and Lifestyle Stable?
Owning a home requires enough financial stability to keep up with the mortgage and associated expenses. Also, many people enjoy customizing their home with upgrades and remodeling projects, which can be rewarding but aren’t cheap. If your income is highly irregular, your current job looks shaky, or you’re considering a major career change, it might not be wise to add the stress of a mortgage.
Furthermore, because of the closing costs associated with taking out a mortgage and the transaction costs associated with selling a home, you might not come out ahead if you need to sell within a few years of buying (unless the market keeps going up). Continued home price appreciation might continue, but you need to be aware of potential changes in housing values.
If you buy a home and the value drops in another year or two, you could find yourself upside down on your mortgage — owing more than your home is worth — and unable to move. For these reasons, it’s best to postpone buying until you’re reasonably sure you’ll want to stay in the same home for years to come. If you might need to make a major move for work or family reasons, waiting until your circumstances seem more stable might be a good choice.
Let’s say you do have a stable financial and family situation, but you have an active social life or lots of hobbies. You might not want to become a homeowner. Renting means less responsibility: no yard work, no maintenance. It also means no repair bills and no need to come up with $10,000 for a new roof. That being said, buying a condo with a well-run, fiscally responsible homeowners association can be a good compromise between renting and owning a house. The association will use your HOA dues to take care of all exterior and communal maintenance.
Also, renting comes with uncertainties that home ownership doesn’t. The landlord may not renew your lease. Rental prices can increase rapidly. You might be forced to move for reasons beyond your control. With a fixed-rate mortgage, you’ll always know what your monthly payment will be for the life of the loan. Then again, you may still face some unpredictable situations due to the cost and timing of repairs, and potential insurance premium and property tax increases.
Is it a Good Time to Buy a House?
Home prices have been been on the rise in Denver for years now. Although the market still favors the seller, depending on the location and time of year, you can find homes where there is room for negotiation and price reductions. Typically during the fall, there are fewer people looking to buy so this type of year bodes well for the home buyer. However, there continues to be great demand for homes under $500,000 and residences meeting that price point sell quickly.
The truth is, no one can predict what will happen with housing prices, because what happened in the past doesn’t necessarily foretell what will happen in the future.
Several factors could increase Denver rents and home prices in the near future:
- A continued influx of new residents could continue to increase housing demand faster than builders can accommodate. Denver continues to be one of the most desirable large cities in the country.
- Relocations of major corporate headquarters to the city continue to occur. Check out some of the companies that have moved to Denver in the last year. As a result, there is a huge demand for apartments and other housing near downtown Denver.
- Mortgage interest rates are at historic lows... again. If you’re getting a mortgage to buy your home — and most people are — the higher the interest rate, the less you can borrow. With current rates well below 3.5 percent, there is absolutely no better time to buy.
- Every time rates increase by 0.25 percent, you can afford about 2.5 percent less home. Your ability to borrow $400,000 at 3 percent equates to a monthly payment of $1,686; at 4 percent, it jumps to $1,910. If home prices continue to go up and interest rates increase, you might be able to buy substantially less house in five years than you can today, especially if your income doesn’t increase.
Is Renting Better for My Finances and Lifestyle Right Now?
The high cost to buy a home in Denver and the major commitment it represents mean that renting will be more appealing to many people, especially given the number of new apartments available. Renting can certainly be more affordable, especially if all you need is a studio. However, most people want a little more room than what a studio or micro-unit offers. According to Zumper, the average rent in metro Denver for a one bedroom apartment in September 2020 was $1,400. Even though this may be a bit less than a mortgage, it's money that goes into the landlord's pocket and you receive no tax benefits.
Newcomers to Denver and those who expect significant career or life changes in the next few years might be better off with the flexibility of renting while they see how their needs evolve. Rapid career advancement or getting married and having kids could have a big impact on what kind of housing you prefer.
The Bottom Line
Simple buy vs. rent reports and calculators don’t take into account all the costs associated with home ownership or all the emotional and lifestyle factors that play into the rent vs. buy decision. You can use them as a starting point, but they can’t make this major choice for you. If you are considering buying a house or condo and wonder how much you can afford, it's good to sit down with a lender and go over your options. If anything, a lender can help you put together a plan to make home buying a reality down the road.
At Usaj Realty, we are clearly in favor of home ownership, but we aren’t in the business of helping people make decisions that they'll later regret. Feel free to reach out to us if you’re interested in learning more about whether buying a home in Denver is right for you.
(Editor's note: This blog was previously published in November of 2019. It has been completely updated to provide current information).
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