There are many things to consider when buying a home.
Since it is likely that the purchase of a home will be
the most expensive purchase of your life, you will want
to consider several things before you even start to look
for a home.
If you are currently renting, you need to know about the possible
advantages of home ownership, and if they apply to your current
situation. Are you financially ready to make such a large
investment? How expensive of a home can you afford? Is the current
market environment favorable for buying a home?
Renting Vs. Buying
Compare the cost of owning and renting the same home. This is
simple enough to do. Just take the monthly mortgage and other
housing costs and compare it with the cost of renting that same
property. Remember to figure the tax savings by taking the cost of
the mortgage payment plus property taxes and multiplying that by
your tax rate. This will give you a fairly good idea of your tax
savings each month. Subtract those savings from your monthly housing
costs if you were buying and compare that with the rental rate.
If they are very close in monthly expense it is usually
a good value to buy.
This can also be a good way to compare the current housing
market. It will tell you if the current housing is a fair value,
over priced or under priced. Just remember that in some very
desirable areas it will almost always cost more to buy then to rent. If the additional expense is more then 20 to 30% you should be
cautious. Be particularly cautious if you plan on moving again
in the next 3 to 5 years.
The Advantages of Home Ownership
It should cost you less to own a home then to rent. There is a
fairly simple calculation that will tell you this:
Take your monthly rent multiply by 200 = purchase price of home
($___________rent per month X 200 = $_________________ )
Example: $900 X 200 = $180,000
In this example, the payment on a
$180,000 home would be comparable to a $900 monthly
rental payment.
In addition to the current cost of rent vs. purchase, you must
also take into consideration the future cost. As a renter you are
exposed to future rent increases. It is reasonable to expect
an annual increase of 4% per year to your rent.
There are many advantages to home ownership. The value of a home
usually increases during the years that you are paying your loan
down. This increase in equity is building up the wealth you
accumulate in your home. Even without this expected increase in
value, paying on a mortgage over 30 years can guarantee that you
will own your home free and clear when you retire. This reduction in
monthly housing expense is something many retirees look forward to. If you choose to trade down after retirement to a less expensive
home, you can use the difference in value to free up a lot of extra
income you currently have in your home. The home equity you
are building in your home can also be borrowed against
at some future time for college expenses, vacations,
remodeling the home or almost anything else you might
need the money for.
Another benefit to home ownership is that you are not subjected
to the intrusion of a landlord. Generally no one can tell you what
you can and can not do with the property. If something is broken you
are not at the whim of someone else as to when, how, or why, it
should be fixed. A landlord can decide to sell the property and put
you out into the street. As a homeowner, you have the security
of knowing that you have a place to live, as long as you
continue to meet your mortgage and tax obligations.
The Advantages of Renting
Generally it is easier to find a place to rent then it is to find
a place to buy. If you are just renting you will more then likely
put up with some minor annoyances because they will only be
temporary in most cases. If something gets broken, you don’t have to
concern yourself with the cost involved to fix it. If the
quality of the repair is not to your standard it doesn’t
matter as much if this is not your property.
As a renter you do not have your money tied up in a property. This allows you to have more flexibility in deciding where you live
and how long you want to stay there. You can keep your excess cash
for other things that come up in your life since you don’t have to
budget for housing repairs and expenses. This allows you to have
your money in more areas of investment such as 401K, IRA, stocks,
bonds, or a small business. This allows you better
diversification of your money.
Renting will also be cheaper then buying if you will be moving
soon. It costs money to buy and sell a house. There are real estate
commissions, title fees, loan fees, reports and inspections. A home
must appreciate approximately 15% just to recoup these costs.
If you plan on moving within a three-year period it may
make more financial sense to rent then to own.
Finally, don’t make the decision based on someone else’s
expectations. This is a decision that only you can make, and
only after careful consideration.