Tips on When to Buy Instead of Rent
Homeownership is a great achievement and a terrific investment. But before you take the plunge from being a renter to an owner, there are lots of things to consider when adding up the true cost of home ownership. Author Suze Orman delineates a few of the most common financial factors that aspiring homeowners tend to misconstrue. Check out her top three tips before you sign on the dotted line:
1. The Low-down on Down Payments - Plenty of lenders offer “zero down” mortgages. For the vast majority of us, this is a very bad idea. Why? Because the biggest challenge with owning a home is not the down payment; the biggest challenge is being able to afford the monthly mortgage payments. Getting the mortgage is one thing. But if you make no down payment, or a small down payment, your monthly costs are going to be much higher. As a general rule, don’t buy unless you can afford to make at least a 10 percent down payment.
2. Rent is not a Mortgage Payment - Let's assume you currently are renting for $1,100 a month, and you now have your sights set on owning a home with a $200,000 price tag. You put $20,000 down and qualify for a mortgage of $180,000. On a 30-year fixed rate mortgage you're looking at an interest rate of 6% these days. That works out to a mortgage of about $1,079 a month. You may be inclined to think that because you have been able to afford $1,100 in rent, you can certainly afford a $1,079 mortgage. Not so. The base mortgage is just the beginning of your housing costs. You also have to consider property tax, homeowners insurance, and if you make a down payment of less than 20%, you are also going to be stuck paying Private Mortgage Insurance (PMI). Then there are all the unplanned potential costs; for instance, if the plumbing goes on the fritz, you have to absorb the cost of fixing it; costs which when you were renting, would be covered by your landlord. On average you need to add another 40-45 percent to get a more realistic total monthly cost. So if your mortgage payment is $1,079, the true total cost is about $1,519 per month.
3. The Tax Break is NOT a Reason to Buy - Homeownership is the absolute best investment out there bar none, and while the mortgage interest deduction is a factor to consider, it should not be your only reason to buy. While it is true that interest payments on a mortgage below $1 million are tax-deductible, that alone is not a good enough reason to buy something that you may not be able to afford.
Comments
There are two things that this article failed to mention...
1) renting does not gain equity. If you rent for 10 years @ $1000/month, you'd spend $120,000. That's assuming that rent doesn't go up due to inflation. If you budget and spend $1300/month for a house, you'd pay 156,000 at the end of 10 years, and have the equivalent of $120,000 in equity. That would be like spending $36,000 to gain $120,000 after 10 years... that's quite an investment. Not to mention that your "payments" are fairly fixed. I remember my mother, at the end of her 30 year loan, paying $280/month for a 3 bedroom, 2 bath house. It may have been a lot of money when she first got the loan, but at the end of your loan period, it would be like nothing.
2)Now is the time to buy. Interest rates are low, there's a HUGE tax incentive to buyers. Foreclosures are a plenty. Use that tax incentive NOW to invest. If you're concerned with the $1000/month renting Vs. $1000/month owning with more money going for repairs... Then lower your sights and search for a lower priced house to balance out the difference. With all the foreclosures out there, you're likely to find something in the same lifestyle you're renting.
To sum it all up, There's very few reasons not to buy. I ran our figures and couldn't find a reason not to buy. Currently, we're paying $1200/month for a 4 br house. We're approved for 160,000 %4.75 apr. Our total payments including insurance & property taxes comes out to approx $1,100/month. That gives $100/month for upkeep. Our landlord has paid approx $200/yr for upkeep. Larger house, more efficient HVAC in new house, and gained equity.... there's now a "for rent" sign in front of our current residence and we'll close in May. We qualify for $8000 tax incentive.
The tax subsidy is not a reason to buy? Holy hannah, the tax subsidy (interest deduction plus property tax deduction plus mostly-free-of-gains-t... status) is the only reason to buy these days. If not for the annual bump from the gubmint you would essentially be guaranteed to be ahead renting (for much less) and investing the difference in treasuries and munis. The subsidies run over $100B/yr. That's real money. That's enough to change investment decisions.
Crikey, someone give that journalist a monte-carlo simulator.
Just wanted to write and say I think this needs to be said more often (by mortgage companies)!!!
The article isn't so blindly bullish if you read the whole thing. Suze has come out warning about speculating in housing for the last couple of years. Heck, even admitting renting isn't a mental disorder is a big step for the main stream press.
Recently, here in Northern Califonia,
I visited an open house. 3 bed, 2.5 bath and 5000 sq. feet lot size. They had on the kitchen table two fliers - one listing purchase price and the other listing price to rent the same place.
I came back plugged in the two figures into one of the rent vs buy calculators... over 5 years that is how much I think I would be staying in that place... I would have saved $100K by renting that place!!!! BTW, this calculator was pretty sophisticated... besides the standard fare of the tax savings of a purchase, but the cost of interest that you give up on a down-payment and also agents commission.
At present, buying a real-estate is like buying an investment that is loosing value. I am sure it is not going to remain this way... but I am waiting until it becomes expensive to rent. I am not going to be the one paying for the mistakes of those who bought real-estate late in 2005 or in 2006.
"Homeownership is the absolute best investment out there bar none" is the kind of tripe-like statement I expect from the Suze Ormans of the world. Would I rather have $1M in an index fund, or $1M in a house? Not necessarily a no-brainer...
I agree there are times to buy, but there are also times not to buy! The wife & I are currently renting a place for $1,800.00 in a neighborhood that is primarily single family residences. It's rather small, about 1,100 square feet, 2 br, 1.5 bath. The house next to the complex (large 4,000+ sq. footer) recently sold for about $6MM (per zillow). Two months ago a 2 bd, 2 ba house that is 1,200 sq. feet (on a small lot with a location no better than ours) sold for about 1.3MM.
This is SoCal and I'm convinced prices will come down, even if only by a small amount. Despite the fact that we get throttled on taxes, given the price differential between renting and buying I'm quite confident we're making the right choice right now. Save save save is our motto - and when the time is right we'll buy.