This post comes from Angela Colley at partner site Money Talks News.
While owning a home can increase your net worth, there are potential downsides as well -- additional labor, hassle and cost, to name a few. In many cases, renting makes sense.
How can you know which is best? Here's what you need to consider:
The minuses of homeownership: Owning a home is a huge time commitment. When you rent, maintenance is someone else's problem and repairs are solved with a phone call. When you own, you're the maintenance man and gardener. When something breaks -- and it will -- it's on you to fix it or pay someone who will.
Homeownership also limits flexibility. When you buy, you should plan to keep the house at least five years, because transaction costs -- agent commissions and other sales expenses -- are high. Sell too soon and you won't recoup those costs.
The pluses: One of the joys of homeownership is investing time to make it yours and make it worth more. What you can do to customize a home you own is limited only by your imagination, budget and local zoning restrictions.
The bottom line: If you want to stay mobile, if you don't enjoy home improvement projects, and you don't care that much about expressing yourself with your surroundings, rent. If you're staying put and watch a lot of HGTV, buy.
The minuses: If you rent, you'll pay the first month's rent, a security deposit, and maybe a pet deposit. Buying means a down payment, closing costs, and other major expenses.
For example, I rent my house. Here's the breakdown:
- First month's rent -- $750.
- Security deposit -- $750.
- Pet deposit -- $150.
- Total -- $1,650.
If I bought a house for the average price in my neighborhood -- $185,000 -- Zillow's Closing Cost Estimator says I would have paid:
- Down payment -- $37,000 (20%).
- Closing costs -- $6,822.
- Total -- $45,822.
The calculator says my monthly payment would be $990, or $240 more than I pay now. And that doesn't include homeowners insurance, property taxes, maintenance or improvement.
According to the Insurance Information Institute, in 2010 the average annual homeowners insurance premium was $909. Property taxes vary widely depending on where you live, but run from hundreds a year to thousands.
The pluses: When you pay rent, you're making your landlord richer. When you grow equity by paying off your mortgage, you're making yourself wealthier.
You have to live somewhere. Paying monthly on your mortgage means you'll eventually own your home free and clear. How much will renters be paying every month 15 to 30 years from now?
Owning a home generally offers inflation protection and the opportunity to own an appreciating asset. Granted, our nation is still recovering from a housing crash, but declining home prices are the exception, not the rule.
Uncle Sam also helps offset the higher cost of homeownership. Mortgage interest and property taxes are tax-deductible.
The bottom line: If you don't have the money and/or credit score necessary to buy a home, the question is moot. But if you can afford to own a home in a desirable area with an expanding population, you'll probably be rewarded financially.
Can an online calculator help with the decision? One way to run the numbers is to use buy vs. rent calculators like those at The New York Times or Realtor.com. But I wouldn't waste too much time on them. While certainly helpful, the answer you get from a calculator will depend on the information you provide -- some of which you can't possibly know.
For example, among other variables, most calculators will ask how much the house you're buying will appreciate annually, as well as how much equivalent rent will increase over time. If you know the answers to those questions, you don't need a calculator; you need a job on CNBC.
Buying? Don't get in over your head
Leaning toward buying? Keep these thoughts in mind:
- To lower the risk of homeownership, buy only what you need, not the most expensive house you qualify for. The average house in 1950 was less than 1,000 square feet. Today it's more than twice that. Remember that whatever you buy, you're going to have to furnish, heat, cool, insure, clean and maintain it.
- If you have bad credit and only qualify for a high-interest mortgage, it will cost you tens of thousands of extra dollars over the life of your loan.
- The more you put down, the less you borrow and the less risk you take.
- Finally, if you decide it's time to buy, hope for appreciation, but don't count on it. However, if the community you're living in has both expanding employment opportunities and population, prices are likely to rise over time.
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