Deciding to rent or buy a home

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 Deciding to rent or buy a home
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Contents
Executive Summary................................................................................................. ...3
Introduction to housing..............................................................................................4
Are you ready to own?........................................................................................ ........4
Is Buying Right for you?........................................................................................... ...6
Considerations....................................................................................................... .....7
1. True Costs................................................................................. ......................7
2. Cash Requirements.......................................................................................9
3. Qualifying.....................................................................................................10
Benefits of Owning...................................................................................................11
Risks of Owning....................................................................................... .................11
Benefits of Renting.............................................................................. .....................12
Risks of Renting............................................................................................ ............12
Resources............................................................................................... ..................13
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Executive Summary

For many, a home purchase represents the single largest financial transaction
they will undertake in their lives. But not every moment in life equates to the ideal time to buy.
With the right tools and direction you can decide if owning a home is right for you or if renting is
your best route. The chart below lays out a comparison of buying factors and benefits with
renting factors and benefits. Each detail will need to be met with personal consideration to make
a decision that fits your lifestyle and needs.

Advantages Considerations

Property builds equity Responsible for maintenance

Sense of community, stability,
Responsible for property taxes
and security

Buy Free to change decor and Possibility of foreclosure and

landscaping loss of equity
Not dependent on landlord to
Less mobility than renting
maintain property

Little or no responsibility for

No tax benefits
maintenance
Easier to move No equity is built up
Rent
No control over rent increases
Possibility of eviction

http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_chart.asp?section=YPTH
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Introduction to housing

Buying a home is often the single largest purchase that someone will undertake in their
lifetime. Likewise, if you rent your home, your monthly payment is likely to be your largest
expense each month. Housing is an important part of life. It is need for protection from the
environment as well as quality of life. Where you live will determine and reflect your lifestyle, if
you have a family, how far your commute to work will be, if you have a pet, and many other
factors. Where you live also depends on how much you can afford, how long you plan to live in
the same place, and your needs.
The decision to rent or own a home comes with many other decision that must be made
beforehand. There are many things to consider such as taxes, true cost, maintenance,
convenience and many others. Answering this big question is a timely process and assumingly a
very important one considering housing is most people’s largest expense. An excellent starting
point is to ask yourself what are my needs and what are my wants. Then keep in mind, needs
take priority over wants, especially when budgeting hits as a recent college graduate.
The following report is separated into different steps in which to think about and proceed
with when facing the question of “Should I rent or buy a home?”

To start off I’ve included a short answer to that question from GinnieMae.

“When is the best time to consider buying? What age? Point in life?
This answer will be different for everyone – and has a great deal to do
with an individual’s own lifestage, lifestyle and financial profile. First
and foremost, a renter must address the basics: Can I afford to buy at
this time? Is my credit in good shape? Do I understand how my month
to month cost-of-living will change, when I factor in new expenses like
property taxes?; etc. One critical factor in the decision to buy-versus-rent is
your short-term versus long-term outlook. If a recent college grad doesn’t
know if he or she really wants to stay in the same city for the next few
years, renting may be the way to go for the short term. If a young
person is ready to put down roots in a community and feels confident
in his or her job – it’s likely that buying is the better way to go. But if both
income and credit history are simply not there, it will be hard to get past “go.” “

Are you ready to own?

Home owning is a big decision.

➢ Start by writing down the reason of why you would like to own a home.
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Now check out if what you wrote down are quality considerations and what else you should be
thinking about. There are many positive reasons to consider buying a home. Did you consider
the financial impact? Owning a home builds equity and also has tax benefits. Another reason
you could have put down is quality of life. Is it important to you to have a place to call your
own, to have privacy, and have freedom to decorate? These are some of the benefits of owning a
home, but be careful they also fall in the want category not the need, except for tax benefits.
Before you become ready to own a home you need to first learn the risks and rewards,
know the key decision factors, and how to get started (FreddieMac, 2009). It has been
statistically shown that first time homebuyers rush into purchasing a home before they are fully
ready. Doing so, they get surprised by things they could have planned and prepared for. Many
first time homebuyers run into financial struggles or unexpected expenses that they have not
budgeted for. Knowing what it truly costs to own a home can turn these unexpected expenses
into budgeted controlled expenses.

➢ Next, think about your future plans and how they might affect your ability to
manage the costs of homeownership.

• Consider whether you need to make lifestyle changes that might include not
taking expensive vacations or purchasing luxury cars, and dining out less.
• Consider the costs of a growing family when looking at your homeownership
budget.
• Consider whether your future plans might include a wedding or college
education for yourself or your children.
Remember the GinneMae article I shared in the introduction. It gives a good overview of
the kinds of things you should ask yourself when answering the question, are you ready to own?
Use the following questions below as a bare minimum checklist to make a decision and answer
that question.
-Do you know what it truly costs to own a home?
-Can you afford owning and paying mortgage?
-Do you qualify to own a home or get a mortgage loan?
-What are all the housing related expenses when owning a home?
-What are your future plans?
-How long do you expect to live in the same place?
-Why do you want to own a home? Needs vs. Wants
-Do you know the risks of owning a home as well as renting?
-Do you know the benefits of owning a home as well as renting?
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Is Buying Right for you?
Many of the same considerations and questions from the previous section can be asked of
yourself to also find out if buying is right for you. Are you ready own and is it right for you are
not the same thing though. You may be fully knowledgable about what it takes to own a home
and the benefits but that does not make owning a home the right decision for you. But again
know the risks, costs, and benefits of buying vs renting (Ginnie Mae, 2009).
Owning a home is part of the American dream right? So how can it not be right for you
right? Well, even though it may be an ideal it is a want again not a need.
• So consider,
➢ Can you afford to buy a home?
➢ How long do you plan to live in the same place?
➢ How certain are you about future plans?
➢ How stable is your job?
➢ How long do you plan to stay working at your current job?
➢ What does your lifestyle require?
Many people continue to rent even though they may be ready to own a home. Many
myths about buying a home can deter these people from ever owning a home. Do not let it stop
you. If you have any concerns or assumptions about owning a home be sure to research the real
answers or ask a real estate agent. A few common assumptions are answered below.
Assumption: I cannot own a home because I am an alien.
Fact: You can purchase a home if you are not a US citizen.
Assumption: I cannot own a home because I have no bank accounts or credit cards.
Fact: You can get an approved home mortgage if you do not have credit cards.
Assumption: I will lose my home if I run into a financial crisis.
Fact: In financial hardship, lenders will work with you to get you back on track. But you
must contact them immediately and tell them your situation.
Assumption: I cannot own a home because I have changed jobs so often.
Fact: Changing jobs does not affect your chance to get a mortgage. The more important
factor is to show a steady income.
Assumption: I cannot own a home because I could never afford the down payment that is
required.
Fact: Not all down payments on buying a home are the same. There are three different
types of mortgages (FHA, VA, conventional income based) and other factors that are used
when determining the down payment required.
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Considerations

1. True Costs

Knowing the true cost of owning a home plays a big part in the final decision to rent or
buy. Knowing the true cost of owning will allow you to decide if you can afford to own a home.
It also plays a role in finding out how much you can afford if you decide that you will buy a
home. Once you understand all the expenses that are related to owning a home you can use
online calculators as tools to help you determine how much monthly payments would be and
how much you can afford. There are a number of factors beyond straight “economics” to take
into account when looking at the true cost of owning a home (Coldwell banker, 2007).
Owning a home means savings in the long run. The amount of money a renter spends on
rent can be about the same as the amount they would pay on a mortgage as a homeowner.
However, this is not true for every situation, but a tax benefit for homeowners makes this even
cost factor easier. Depending on the amount of rent you would pay and the price of the home
you consider to buy, owning could mean significant savings. Owning a home has tax benefits
that decrease the total cost of owning. When you rent, you essentially pay the property tax for the
landlord and incur the cost. As a homeowner, you also pay the property tax but the amount can
be subtracted from your income before income tax is assessed. You can deduct the interest on
your home mortgage and property taxes you pay on your home. These tax savings reduce the
actual cost of owning your home. These savings can add up quickly and mean owning a home
may be cheaper in the long run. The benefits do take time which is why it is important to
consider how long you expect to stay in the home you consider living.

➢ Consider the following comparison chart from Ginnie Mae. The chart below shows a
cost comparison for a renter and a homeowner over a seven year period.

• The renter starts out paying $800 per month with annual increases of 5%
• The homeowner purchases a home for $110,000 and pays a monthly mortgage of $1,000
• After 6 years, the homeowner's payment is lower than the renter's monthly payment
• With the tax savings of homeownership, the homeowner's payment is less than the
rental payment after 3 years

Rent Mortgage Monthly After Tax Yearly After Tax

Years
Payment Payment Difference Savings Difference Savings
1 800 1000 -200 -50 -2400 -600
2 840 1000 -160 -10 -1920 -120
3 882 1000 -118 +32 -1416 +384
4 926 1000 -74 +76 -888 +912
5 972 1000 -28 +122 -336 +1464
6 1021 1000 +21 +171 +252 +2052
7 1072 1000 +72 +222 +864 +2664
8-30 Savings increase every year
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Now take a look at many of the common expenses related to owning a home.
1. Purchase Price
2. Annual Taxes
3. % down when purchase
4. Closing cost
5. Interest % on new home loan
6. Term of the mortgage?
7. Monthly payments
8. Homeowners insurance
9. monthly total payment with taxes and insurance
10. Maintenace costs
11. Utility costs
12. Home Owner Association (HOA)
13. Membership Fees
14. Other costs, vary on type of home and geographic location
○ Flood insurance
○ Other required property insurance
○ Condominium assessment fees and
○ Other condominium escrow items.

Wow, that quite the list and most of the expenses in that list are variable. Property tax
will differ by location varying by county and state. Maintenance costs vary by geographic
location, size of home, and age of home. Utility costs such as, electric, gas, water, heating, and
air conditioning vary by geographic location, size, season, and age of home. Home owner
association fees do not apply to all purchases but it pays for things such as trash and snow
removal and maintenance of common grounds if applicable. Membership fees include monthly
passes to recreational facilities, cable tv, and internet. Depending on the size of home you buy
and the mortgage plan you chose, down payment, interest rate, closing costs, purchase price, and
monthly payments will all vary.
The average number of years to stay in a home is 7 years. This is the long term aspect
that needs to be considered for home owning benefits like taxes. Looking at that list, there sure
are a lot more factors than just a house price. But is renting only a monthly rent price?
Now consider the common expenses related to renting.
1. Rent
2. Utilities
3. Insurance
4. Taxes
Your rental company takes part of your rent payment to cover certain housing expenses.
Differentrental places offer different amenities. Some may include utilities, parking, furniture,
and maintenance; other may not. Many offer their own exercise facilities and other amenities
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that can reduce monthly membership fees. But as a homeowner it is your responsibility for all
these expenses. An important thing to keep in mind as well is that rent prices can increase while
monthly mortgage prices may be fixed (Coldwell, 2007).
2. Cash Requirements
Initial costs to rent may include a month’s rent deposit, application fee, and first rent
installment. However, initial costs to buy will be significantly higher and typically include
closing costs, percentage down, and some fees. It is important to calculate how much up front
costs you need to both rent and buy when you are looking at housing. This will keep you in an
affordable range and within your set budget.
➢ Starting off, to calculate your home buying potential (aka how much you can afford),
calculate-income, savings, monthly expenses, and debt.
➢ After calculating workable income and how much you have available, consider how
much you are willing to spend on the purchase of a home. Consider your lifestyle and
needs.
Worksheets and loan calculators commonly found online at and real estate page are useful
tools todetermine how big a loan you can afford. Check out, Ginnie Mae, Freddie Mac,
Minneapolis Lofts and Condos or Coldwell Real Estate.
➢ Using a comparison chart and calculator to do some different numbers consider what
savings and cash you will have left after paying any up-front costs. This money would
goto support non housing-related expenses and emergencies.
Recommended, is that you have at least three months of living expenses available after
closing on the loan. It is always smart financial management to keep three months expenses in
reserve for emergencies or unexpected and trouble times.
Closing costs as noted above in true costs of owning, depend on the location of the
homeand type of loan program. The closing costs can be negotiated with the seller at the time of
purchasing. Funding for purchase related costs can come from different resources. Savings and
cash can be used for up-front payments which include closing costs and down payment for
ahome.
3. Qualifying
This section talks about the feasibility of getting a loan. If you cannot or are not ready to
get a loan for a home then you are not ready to buy a home. A home mortgage is considered
good debt like student loans. Remember, owning builds equity and saves on taxes.
➢ Look at your current situation and determine if:
• You have a steady, reliable source of income and a steady employment history for at
least two years.
• You have a credit history.
• Your total debt is manageable and you can afford to take on the costs associated with
homeownership.
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• You have money saved for a down payment and closing costs or you have access to
other sources of funds, such as an employment bonus, tax refund, or a gift from a
relative. (Freddie Mac, 2009)
The prior section on cash requirement asked you to calculate your income, savings,
monthly expenses and debt; lenders look at income, savings and debt information to determine
how much they are willing to loan you for your home purchase. Specifically, they calculate your
debt-to-income ratio. This is the ratio between a borrower's monthly payment obligations
divided by his or her gross monthly income. Knowing this yourself can help you understand
your ability to pay monthly loan payments, which include principal, tax, and interest.
There are different types of loan programsthat you may qualify for or want to consider
for a variety of reasons.
• FHA
• VA
• Income or Conventional
Each type of loan allows you to apply a different percent of income toward
homepayments to qualify for a loan. Government loan programs like FHA allow you to take
29% of your income as the percent that can be used toward housing paments. VA allows 41%,
making it easier to qualify because a higher percent of your income can be considered. The third
type of loan program known as conventional loans use 28% of income. This means that your
monthly loan payment should be no more the 28%, 29%, or 41% of total monthly income,
depending on the loan program you use or qualify for. But, whose to say these number are what
you should use as a monthly division of income. My interview with Loren Wahl a three time
home buyer suggested about 20% of income should be used for housing related expense.

Benefits of Owning
The pros and cons of owning a home and those of renting one can provide a good
comparison as well as visual overview to help decide what is right for you. If the benefits are not
ranked on the most important end of the scale in your needs and wants at this point then maybe
the benefits of renting are.
Homeownership

• You have something to call your own.

• Tax benefits mean you will pay less federal income taxes.
○ mortgage interest, property tax, and other payments associated with financing a
home can apply to your tax deductions
• The worry of rent inflation is mitigated with a fixed rate mortgage.
• Builds equity and financial security in the long run.
○ Appreciation means the value of your home can increase. Also, your total
mortgage amount decreases over time so your payments are worth something.
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• Shows independence

Risks of Owning

Sometimes there may be an advantage to living in a community style building. Owning a

home does have it’s risks, not necessary bad parts of owning a home, just things to consider as
your responsibility.
• Although not always monthly housing expenses can increase.
○ This is what is usually offset through the tax benefits.
• You are responsible for everything that happens to the property. No more landlords.
• Selling can be costly and timely which may be problematic if a situation arises that calls
for a lifestyle shift or move.
• Although appreciation is typical, the property can depreciate, making selling difficult.
(Freddie Mac, 2009)

Benefits of Renting

Perhaps you call for a carefree, convenient, and mobile housing preference. Renting has
a handful of benefits of its own like owning that makes some people rent their entire lives.

Leasing

• Maintenance falls on landlord

• Utilities can be set up or even included in monthly rent
• Moving requires ending a contract rather than selling the property.
• Appliances can be included and cut down initial costs of living.
• Smaller deposit required
• Can include community amenities like gym, pool, and social activities.

Risks of Renting

Monthly payments for rent do not result in acquiring any property. It is like paying a fee
that does not give you anything tangible. Renting does not have any future financial benefit like
building equity on a home. The control of the property is in the hands of the owner, landlord to
the lease. This means that maintenance of the property could potentially be below your own
expectations and restrictions may be enacted in which you can not modify or add to your living
lifestyle.
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Which Neighborhood?
Get hard data about schools, taxes, safety, and much more.
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Resources
1. Freddie Mac. Buying and Owning a home.
http://www.freddiemac.com/corporate/buyown/english/preparing/right_for_you/. 4-01-09.
2. Ginnie Mae.
http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_chart.asp?section=YPTH
3-29-09.
3. New Buyer. Home buying Guide.
http://www.newbuyer.com/homes/homeguide/deciding/rightforme.html. 4-01-09.
4. ColwellBanker. To buy or Rent.
http://images.agentcenter.com/client/1/4/7/33741/Buy_or_Rent.pdf
5. Interview.
6. Interview.
7. Interview.