Rent vs. Own Advice

You may be tired of moving, you may be weary of landlords, you may want to settle into your own place and perhaps start building some of that much coveted equity every homeowner talks about.  Buying a home can be both a personally and financially rewarding experience, however the process of acquiring then maintaining a property can be time consuming and well as financially and emotionally overwhelming if you are not ready for it, one must be prepared and fully informed as to the commitment home ownership requires.  Too many new home buyers make the mistake of falling in love with then having their hearts set on a particular home thereby making an emotional decision to purchase it rather than thoroughly evaluating their financial goals first before setting out and looking for a home. You must consider all of your financial goals before leaping into homeownership.  Don’t allow the financial commitment of owning a home seize complete control of your financial future.

Advantages of Renting:

Many people enter into retirement with a substantial amount of money tied up in their home.  As a renter, rather than an owner, you can keep your investments in financial assets that are far easier to tap into when you need them.  And while owning a home can pay off tremendously over time with a substantial build up in equity, a renter who is able to save 10% or more of his or her income should do quite nicely in reaching their total financial goals. As a renter you avoid the endless hassles and expense of keeping up and maintaining a property.  You also have complete freedom and mobility to move whenever your lease is up.  This could be particularly important if you anticipate frequent job changes which could require you to relocate.

Advantages of Owning:

Buying and owning a home is a good way to build wealth over time.  As a homeowner you could reap the considerable benefits of rising real estate prices, thereby utilizing a significant form of forced savings.  Another key savings is the decline in monthly housing expense a homeowner will experience over time, assuming you do not refinance and take out a larger mortgage. While your mortgage payment should remain the same, which would be the case with a fixed rate loan, it will actually decline as a percentage of your monthly income as your earnings gradually increase. However rent will almost always rise with the rate of inflation, keeping pace with the appreciation of income properties in a given area. You can also take advantage of important tax breaks to help cover the expenses of ownership as mortgage interest and property taxes are generally deductible on your federal return.* The most substantial tax break you could receive through home ownership occurs when you ultimately sell the property and benefit from the capital gains exclusion.* There is also much pride and enjoyment to be taken from being able to purchase and improve a home according to your own style and taste,  something a renter is unable to do while living in a property owned by someone else.

How to Determine if You are Ready to Buy:

1. You plan to remain in the home for a minimum of 3 years.  This is important because in a normal housing market, it can take 3 to 6 years for a home to appreciate enough to recoup the costs incurred in acquiring the property.  The housing market experienced in the U.S. over the past half decade was far from normal in most areas.  You must use caution when purchasing in a particularly “hot” area because if the market were to correct after you closed on your home, it could taken even longer for you to recoup your costs.  Note that the normal annual rate of property appreciation in the U.S. has been about 5% on average per year since 1950. In the last 5 years the cumulative rate of appreciation over that period has been 57.58%, far above the historic rate. Be realistic rather than overly optimistic and you can avoid making a serious mistake.

2. You are a mature, seasoned manager of your own finances.  The savings realized through home ownership (namely through appreciation) applies only if you can resist the urge to drain your hard won equity by tapping into it through home equity lines of credit (HELOC’s) and the like.  If you use your home and it’s equity as a virtual cash register for making consumer purchases, when it comes time to sell it or retire, there will be very little if anything left. 

3. You already have money saved, or funds set aside, in anticipation of making the purchase.  Home ownership, and the considerable expenses incurred in the process of achieving it, frequently comes as a shock to most people.  It’s a rare first time home buyer who isn’t stunned by the amount of cash that flies out of their wallet as they begin the process of decorating, repairing and maintaining their first home.  If you’re going to drain your savings account making the down payment, be sure you recognize and prepare for the expenses of moving in and getting settled so that you don’t find it necessary to go deeper into debt.  Your mortgage professional may tell you to plan on having at least 2 months total loan payments as reserve when you close escrow on the property.  I would suggest at least double that amount to help cover unforeseen expenses.

4. Lastly, it helps if you can handle a few minor repairs around the place yourself.  Being somewhat handy around the house can certainly easy your stress level if and when things break down and will also ease the strain on your pocketbook, especially during the first few lean years of ownership.

Fannie Mae & Jumbo Mortgage Rates     Just One Click! = Current Rate Chart

*Refer to the section on the “Tax Considerations of Home Ownership”