A blog cannot deal with all aspects of a subject and is not intended to replace professional advice. It's purpose is to highlight information and identify areas of possible interest. Anyone wishing to discuss this blog or to make any comments or suggestions about this blog is invited to do so by either posting comments or emailing me directly.
August 9, 2011
Renting Versus Buying: Which is a Better Option for You?
Buying a house can certainly be the most rewarding purchase you ever make. However, depending on your current circumstances, this may not be your very best option. To help make an educated decision, try to answer the following important questions first:
1. Do you really want to own your home?
Some would argue that this is the first question you should ask yourself. Like everything else, home ownership is a matter of choice. Only you can decide whether or not home ownership is really important to you. If homeownership is something your really want, then you may want to compete an evaluation on where you spend your money every month and re-assess some of your current choices.
2. How often do you expect to move in the near future?
If you expect to be moving every couple of years (or more often) then you probably shouldn't consider buying your own home. Every time you buy or sell a home you incur significant costs: Legal fees, registration fees and marketing fees alone average 5% to 6% of the selling price; then, there's the cost of breaking a mortgage mid-term (which could be waived by your lender) which could be tens of thousands of dollars! Unless you get lucky and the value of the home you purchased goes up by at least 7% - 10%, you'll be losing money.
3. How stable is your employment situation?
You should only consider buying a home if your employment situation is stable. Home ownership requires a number of regular payments like the mortgage payments, property taxes, condominium fees (if applicable), regular maintenance, insurance, etc. Missing any of these payments can trigger terrible consequences for a homeowner. Unless your employment is stable, your best option is "renting."
4. Can you afford to make the monthly payments?
When qualifying for a loan, most lenders will not allow your housing costs to be more that 32% of your gross income. Housing costs include your mortgage payment, property taxes, utilities, and 50% of the condominium fees, if applicable. If your total debt servicing costs (those housing costs plus all of your other monthly debt payments - like car payments, credit card payments or other consumer debt) exceed 40% of your gross income you will not qualify for a mortgage.
How much rent are you paying now? How much are you adding to savings each month? What is the maximum amount you are willing to pay for housing cost and savings? Your mortgage payment has an expense portion (the interest) and a savings portion (the principal repayment).
If you buy a home, it is important to have some additional money set aside for "emergencies". You may not be able to save as much money as a homeowner as you did when you were renting, but it is important that you leave some room in your budget. If you have to stretch your budget too far, you should definitely reconsider your home purchase until another time when it's not streched so much.
5. Do your arithmetic homework
In buying a home, housing costs can be divided into shelter costs and investment costs. When you rent, you pay your shelter costs, and the landlord pays the investment costs. When you buy, you pay both. When you finally do go to sell the house in 10 years, you will find that your investment did well and you saved a lot of money by buying. Many would say that home ownership of your primary residence should always be looked as firstly providing your necessary shelter and to a lesser degree as an investment vehicle.
From a purely financial standpoint, whether you should rent or buy comes down to your monthly budget and the cost of borrowing. If you have the down payment and interest rates are 5% or lower, it makes very little difference whether you rent or buy - the costs will be about the same when you consider the mortgage amount as being partly housing expense (the interest expense) and a savings vehicle (through principal repayment). At interest rates above 7 or 8%, buying will likely cost you more than renting. Although it might seem that you will be spending more money on buying a house than renting, you need to consider your options and priorities. There are many more advantages of purchasing a home over renting - like being able to make your own modifications or redecorating the home.
Buying a house primarily meets your housing needs, but it is also an investment vehicle, and for many people that don't move around too often it is a very good one. You can purchase insurance to help you manage any potential risks like fire, theft, and other disasters. Remember, to always take your buying/selling costs into account when you're considering selling your home. The strength of the real estate market in your area will determine the return on your investment. The longer you own the home, the more return on your investment that you should see. While the general trend for the last several decades has been increasing, there are always a few years of decreases - and they hit like a ton of bricks! The market has always come back - over time.
Assuming that you can afford the costs of owning your home, the question remains, "What's better, renting or buying a house? The answer is truly, it's a matter of personal preference. There is a certain satisfaction in owning your own home, but only if it is important to you. If you need to be mobile and are only planning on staying somewhere for short period of time (less than five years), renting is almost always better; the transaction costs of buying and selling houses alone will make it less expensive just to rent.
For longer periods, buying a house is usually better. Although if you have the discipline to invest the difference between your rent and your potential mortgage and other buying costs in a reasonably high yielding investment, renting might be better. But that's if you carefully figure out the difference and diligently invest that difference. If you can't do that then buying is probably the better choice. Home ownership should always be viewed as a long-term commitment and never as a short-term flip.
Buying a house is usually a sound long-term investment as it helps you build equity versus throwing your hard-earned money away as rent. Real estate generally appreciates - a house bought today is most often worth more a few years down the road.
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