Buy versus Rent

Buy versus Rent

A home is one of the most expensive purchases most of us will ever make during our lifetime. Whether you decide to rent or buy, either choice comes with its own rewards and risks.

A home is one of the most expensive purchases most of us will ever make during our lifetime. Whether you decide to rent or buy, either choice comes with its own rewards and risks. Homeownership offers many advantages over renting including:

Advantages of Buying versus Renting

Buying Renting
Tax write-off. No tax write-off.
You can upgrade your home as you see fit. Need permission to make any changes.
Build equity in your home as value appreciates. Your money goes toward the landlords equity.
Control of loan payment options
Compare mortgage rates.
Rent can increase periodically.
Pride of homeownership. You have no ownership.

While owning your own home has many benefits, there are still risks to consider:

Disadvantages of Buying versus Renting

Buying Renting
You're responsible for property maintenance. Your landlord or manager handles general repairs.
Need to sell, rent or lease property in order to re-locate. May have to wait until market conditions are right. Freedom to move once your lease expires.
You pay for all your own utilities, property taxes and insurance. May include utilities, property taxes, and property insurance.
Home improvement upgrades can run into the thousands of dollars. You're not financially responsible for improvements.
Homes can depreciate in value depending on market conditions You don't have equity, therefore nothing to depreciate. However, depreciation of home values may cause rent to rise.

However, all things considered, homeownership is by far one of the best single investments you can make given the potential long-term benefits.

When does it make sense to buy?

People who have rented for several years want to purchase a home for various reasons. One reason is that owning something of value with a chance of watching their investment appreciate. Purchasing a home to save money over the long-term is another.

Example

Assume you're currently renting a 2-bedroom, 2-bath apartment with a monthly rent of $1,000. You find a 2-bedroom, 2-bath home at a market price of $250,000 (roughly the national average.) You have $25,000 saved - enough for a 10% down payment. For the purpose of this example, you're looking to finance $225,000 which includes closing costs. Compare mortgage rates.

 

Assuming a 6.20% APR mortage loan, your monthly payment would be approximately $1,385. If you assume a 1% property tax rate and and a 4% annual appreciation in value your effective monthly payment over five years would average $499 per month.

Costs Savings of Buying versus Renting

Results
Calculations Rent Purchase
Monthly rent/estimated mortgage payment $1,000 $1,385
Purchase price of home   $250,000
Percentage of down payment   25,000
Length of loan term (years)   30
Interest rate   6.2%
Years you plan to stay in the home   5
Yearly property tax rate   1%
Yearly home value appreciation rate   4%
   
Price of home after appreciation   $304,163
Remaining balance after 5 years   209,887
Equity in house   94,276
Tax savings (28% bracket)   23,030
Avg. monthly payment over time 1,047 499
Total payments (over 5 years) $62,820 $29,973
Total savings if buying $32,847

Source: Ginniemae.gov. These calculations are estimates only. You should always seek the guidance of financial or tax experts before making any buying decisions.

The outcome could dramatically change should an unforeseen economic downturn or financial hardship occur (e.g., home improvement costs, catastrophic damage, etc.). While, no one can predict if home appreciation values will spiral downward, or if mortgage interest rates will rise, it's clear that under the right circumstances home ownership can be financially rewarding.

Image: Image courtesy of renjith krishnan at FreeDigitalPhotos.net
6 Pitfalls to Avoid When Buying A House

6 Pitfalls to Avoid When Buying A House

Once you are on your way to homeownership there are certain precautions you will want to take to further minimize your risks.

Once you are on your way to homeownership there are certain precautions you will want to take to further minimize your risks. Here are some tips to make your buying experience a more positive one:

Know what you are paying for upfront. Throughout the mortgage lending process, you will be faced with a list of fees. From origination and escrow fees, to title insurance and property taxes, some may seem inflated while others fall in line with your expectations. You should always question a fee you are uncertain about.

Try to avoid an early pre-payment penalty. Everyone wants to have the flexibility of paying off their 30 or 40 year mortgage early or refinancing when rates go down. The reward is not only owning your house outright but saving on interest charges. Work with a lender who is willing to waive any pre-payment penalties or can offer you the ability to refinance your mortgage at a better rate.

Watch out for the classic bait-and-switch. A lender may try to reel you in with low interest rates, no money down, or no closing costs, only to inform you that you have a less than perfect FICO score. If you feel you are not getting the best rate and loan options, look for a lender you feel more comfortable with.

Don't let real estate agents pressure you to buy. Real estate agents are motivated to sell homes in order to earn a commission. They may convince you the property meets your needs, but you should make the decision without feeling pressured. Remember, the real estate agent works for you and has a fiduciary responsibility to protect your best interests. Always comparison shop for the best rates and programs.

Buy only what you can afford. Stay within your debt-to-income ratios and this can help prevent you from over-extending your debt. Compare mortgage rates and, if necessary, use an affordability calculators to determine the minimum and maximum amount you can afford before going house hunting and stick with your estimate.

Never buy a home on impulse. At some point during your search for a home you may decide to settle for less or get caught up in a bidding war for a house you do not necessarily want to buy. Staying within your budget can be a real challenge, especially if a lender approves you for a higher loan amount then you feel comfortable with. Give yourself time to think about your options and walk away if you feel it is a questionable deal and see how you feel about it the next day.

Compare the best mortgage rates.

Four Things to Know Before Buying a Home

Four Things to Know Before Buying a Home

When buying your next home, you might be overwhelmed by the decisions you have to make. Here are four questions to ask yourself when buying your home so you can be better prepared and make a more informed decision.

When you are buying a house, there are many things to consider. Unfortunately, the excitement of buying a new home can cause many people to forget about certain considerations and they often rush into the purchase without being smart about the decision. Before you sign the dotted line, take a step back, breathe and ask yourself the following questions to make sure you are making the right decision.

How Long Do I Plan on Staying?
If you are considering buying a new home, you should plan on staying in it for at least a few years. If you are in a transition phase in your life and you may be moving soon, buying a home right now may not be fore you. The costs of closing and other fees associated with buying a home are enough such that you will lose money on the purchase if your do not stay for a few years and build up equity. However, if you plan on staying in the home for five years or more, it may be a wise decision to buy instead of rent.

Can I Afford This Home?
Being able to afford a new home is more than just being able to make the payments. Your lender may tell you that you can afford the home, but it is up to you to make the final decision. You have to consider the insurance, property taxes, maintenance and utilities that will also need to be paid regularly. Lenders do not generally consider these other costs and they often just look at your income to compare it against the monthly mortgage payments. That is one of the reasons the housing industry fell into the financial crisis that has occurred in recent years.

Is My Credit Good Enough Right Now?
If you have blemishes on your credit report, you may want to consider waiting six months to a year before buying a new home. Take this extra time to clean up your credit and bring up your score as much as possible. You may have a score that qualifies for a mortgage loan, but raising your score will help you qualify for a reduced interest rate which could save you thousands of dollars over the term of the mortgage.

Does the Area Have Good Schools?
Living in an area that offers good schools is great for two reasons: Your children will get a good education and it is a great selling point if you decide to move away. That second reason is why you should try to find a home near good schools even if you don’t have kids. For most families, living in a good school district is the top deciding factor when choosing a new home.