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Rent vs. own dilemma
Q: With apartments these days, rent has gone up extremely high in many areas. It seems I might be better just buying a condo and expecting to pay about the same on a mortgage as I would on an apartment? What are the pros and cons?
Hercules, CA
A: Are you ready to end life as a renter?
Home ownership is a big step with many pluses and minuses. For many Americans, however, it's a good way to build an investment. In effect, it's a forced savings plan. Each month you pay your mortgage you reduce the loan balance you owe, which builds your "equity" in the home.
Equity is the difference between the sale value of your home and the amount you owe on the mortgage. It's how much money you would receive yourself if you sold the house. You can also look at equity as the part of the house that you own compared to the part of the house the bank "owns" until you pay off your mortgage.
The value of your home will most likely rise, or appreciate, over time as well. So, you'll build additional equity this way. Although the value may fluctuate up and down in the short term of a few years, over the longer term, it's bound to rise or appreciate. Historically, residential real estate prices have risen approximately 3% each year. Of course, this fluctuates greatly depending on your locale.
For most people, the opportunity to invest in property that will rise in value over time is a primary reason for owning a home. Statistics appear to show that home ownership can make a significant positive impact upon the economic status of a household. Of course, other reasons for owning a home exist too, such as pride of ownership and the chance to make a house your home by decorating, customizing, and remodeling to your heart's desire.
Home ownership also provides a tax advantage. The tax laws allow you to deduct all of the mortgage interest you pay each year from your taxable income. For this reason, even if your potential mortgage payment is higher than your current rent, it may actually be cheaper to buy than rent. While you will pay more each month on your mortgage, you will pay less on April 15 in taxes. The Rent vs. Buy Calculator will help you determine whether your anticipated mortgage payment might actually be cheaper than your rent. RENTNET® also contains some additional Mortgage Payment Calculators that will help you determine how much you can afford to pay.
For most people, saving the money for a down payment is the primary barrier to buying a house. Although some home lending programs require only a 3 1/2% down payment, most require at least a 5% to 10% down payment. In addition, a homebuyer typically incurs some additional costs associated with buying a house known as closing costs. Typically, these can add a few thousand more to the amount of upfront cash you will need to purchase a house.
Overall, homeownership is a positive thing when you're ready for it. It's a much greater responsibility than renting that comes with lots of benefits. But, there are some cons to home ownership as well.
Right now you probably call your apartment management whenever something needs repairing. The management also takes care of grounds maintenance and building maintenance such as painting. When you own your own home, of course, you either have to do the repair and maintenance yourself or pay someone to do it out of your own pocket.
In addition, you aren't as mobile. If you rent, especially if you rent on a month-to-month basis, you can pick up and leave an area very quickly. If you own a home, depending on the real estate market, it can take quite awhile to sell your home. If you buy when real estate market prices are high, your home price can actually decrease from your purchase price, or depreciate. This can make it very difficult or almost impossible to sell your house, especially if you bought it recently with very little down payment.
Home ownership is a bigger commitment than renting in many ways. It's a commitment financially because you have a 30-year mortgage to pay. It's a commitment geographically to both a city or town and the particular neighborhood you choose. It's a big decision that you shouldn't take lightly. Make sure it's the right one for you at this point in your life. RENTNET® affiliated site, Homestore.com, also contains a list of resources for the first time homebuyer. You'll find some more information to consider there. Becoming a homeowner may not be right for you now even though it might be in a few years.
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