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 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?
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.
Remember, 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.
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 multiplied 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. The equity you are building in your
home can 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.
Generally, it is easier to find a place to rent than it is to find a place to
buy. If you are renting, you will more than likely put up with some minor
annoyances. 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 than 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.
