STEWART REAL ESTATE COMPANY: NORTHERN CALIFORNIA.
 Rent or Buy? 

Each year a new wave of first time home buyers hits the trail in search of their humble abode. As a realtor for nine years I was often met with the challenge of helping these eager buyers to understand the true value of home ownership. There are pros and cons to buying a home and there is the matter of timing, which can have a lot to do with the housing market and related financing programs.

Consideration #1 on buying a Home vs. renting

Buying a home means garnering equity, if the owner keeps the house long enough to overcome the initial cost of its purchase, that is. That can be one of the most surprising matters associated with home ownership.

Consideration #2 on buying a Home vs. renting

Buying a home brings a sense of pride and accomplishment. Buying a home is also an opportunity to express more freely your personal taste, as long as the neighbors don’t have to view your idea of a decent-looking sculpture in your front yard every time they pull out of their driveway. Not only is there more freedom with home ownership, but there is likely more space than one would find in a rented apartment.

Consideration #3 on buying a Home vs. renting

Buying a home brings a realization that you are part of a more permanent community in which you might be a contributor to the well being of others around you. In a rented home or apartment one might feel less involved and temporary when we humans tend to be territorial, inherently needing to claim a piece of ground as our own with its sense of permanence. We think about raising children and providing them with “roots” that grow in a yard rather than on a crowded balcony.

Financial consideration #1 on buying a Home vs. renting: When owning a home, each monthly payment is like putting money into a savings account rather than giving it to the landlord when renting. Each time the mortgage is paid a percentage goes toward your “equity.” This is indeed like having money in the bank as it is something you can draw upon later if needed. Whereas rental rates increase yearly, the principle on your mortgage is going down with each payment. Plus as the housing market grows, so do the valuations of homes.

Financial consideration #2 on buying a Home vs. renting: Buying a home is also accompanied by some interesting tax benefits. Every interest payment you make becomes a tax deduction later. You can’t do that with a rental payment. You surely can’t do that with an auto loan either. But imagine buying your next car with a home equity loan that is indeed tax deductible. In this sense you are leveraging your equity. Buying a home sounds great! But it isn’t for everyone. Just getting into home ownership can be a nightmare. Buying a home is a time-consuming and complex, not to mention costly, endeavor.

Responsibility #1 in buying a home vs. renting: As a tenant in a rented home or apartment you have more freedom to move about the country. Owning a home requires an investment of time. You are now out mowing lawns, pruning hedges, managing the leaking pipes, and spending countless hours you had not expected keeping things running smoothly.

Responsibility #2 in buying a home vs. renting: Many small home improvements can add up to big dollars invested in upkeep expenses. You might also find yourself paying for utilities that are otherwise covered in a rental agreement. If all of the upkeep outside the home is a problem, you might consider buying a condo. You will reap the rewards of home ownership with some minor constraints; and there is typically a monthly fee attached to condo and townhouse living called the “association fee.”

Responsibility #3 in buying a home vs. renting: If you find you aren’t exactly thrilled with your new neighborhood, you may find yourself “stuck” until the value of your home increases enough to get back your initial investment. Selecting a home that you will occupy for a good long time takes patience, and initial homework. Anything can happen once you become a home owner to unexpectedly deteriorate the value of the home along with its enjoyment. In a rental you can pick up and move on. In a home you have to stay and endure what nature, neighbors, and nearby businesses might throw at you.

Responsibility #4 in buying a home vs. renting: Rivers can flood, parking lots can become extended to your lot line, and teens can become drum players, keeping you up for nights on end with raw talent. All of this can happen a month after you’ve moved into the peaceful neighborhood. Residential neighborhoods usually come with dogs. You might be tempted to own one yourself. Keeping yours quiet can be a challenge when ten others are sounding off. Weighing the pros and cons of renting and buying a home can be challenging. There is a possible freedom of movement in one instance and financial freedom in the other. Homeowner responsibilities can be far greater than expected.

Tip #1 on what to watch out for when buying a home: Drive the neighborhood at different times of the day and week to see how your potential neighbors behave both during the week and on weekends.

Tip #2 on what to watch out for when buying a home: Check into the schools and surrounding businesses. Look for those conditions that contribute to “economic obsolescence.”

If you choose your new home (and the mortgage) wisely, you will find home ownership greatly rewarding. Although most people today don’t remain in their homes long enough to see the mortgage release arrive in the mail, personal satisfaction abounds.

For some additional help, Buying a New Home offers some tips on knowing what you can afford, knowing your rights, and shopping for a home. When it comes to searching for the mortgage, there are few parameters you need to digest in order to make the best selection.

Choosing a mortgage is not only about the lowest interest rate. There are other factors to consider in determining if the mortgage is right for you. The lease on an apartment or house is pretty straightforward. The mortgage process is a great deal more complex. You will need to do an analysis of your financial position much more exactingly. Consider your income, savings, and cash on hand. Determine your debt-to-loan ratio ability. The analysis should include a look at your past spending habits, your present needs, and your potential for success in not only getting the right loan, but in keeping it paid. As to your lifestyle, consider how long you intend to live in the home, whether you are going to need to save for college expenses, and whether you are expecting an increase in pay. These and any other eventualities will need to be considered in your affordability determination.

A short-term loan might be the right choice for a short-term stay, but a traditional 30-year fixed rate loan like your parents likely held when you were in grade school are still and often the best choice. Payments are stretched out over an extended period, with lower payments involved, making these types of loans more affordable. You can still double up on the payments and get the principle paid faster like the short-term loan, but without the threat of foreclosure if you have an unforeseen event. In unfortunate times, you can resort to making the lower payments as originally scheduled.

In your haste to pay off your mortgage, however, you may forget to account for college or other expenses that may crop up. There are also a host of conditions that will affect your determination such as age. If you are close to retirement when buying the home, you may not want the mortgage around in ten years. But again, with a 30-year mortgage you have the option and leeway to pay more each month and pay the loan off sooner. There are even some interest only and 40-year mortgages cropping up to help make home ownership more affordable. The mortgage may outlive you, but with the prices of homes souring and incomes somewhat dropping, these options can become the only means to gain home ownership.

Understanding the financing can be a complicated matter. People who can help you to make your financial decision are the lender, the realtor, the attorney handling the closing, and a tax preparer. For some additional tips on mortgage selection, Choose the right Mortgage and Save provides some advice on how to get the right mortgage plan. Once you have made your mortgage selection, examine the monthly payments and tax benefits as well as any hidden home ownership expenses such as potentially higher utility bills against the monthly rental fees at the apartments around the corner. Those may or may not include paying for utilities. You need to include all costs in both instances in order to make a fair comparison.

Generally, buying a home is more costly than renting. Often people make the same mistakes when they purchase a car. They do not allow for the maintenance such as new tires. With a house this can mean putting money aside for the leaking roof or the failed heating system. A good rule of thumb is to put aside 10% of your income toward home ownership expenses. If the tax savings are indeed saved, this may very well cover it. So let the house pay for itself in essence. Don’t rely on the tax reimbursement for the purchase of a new set of golf clubs. Chances are it will go right back into the home. And it should. If you can put the taxes into paying the mortgage, you have found another way to put the savings to good use.

Even though buying a home is more costly than renting and the threat of foreclosure can be at the discretion of the lender, you have a sense of security knowing that if you can’t maintain the cost, you may be able to sell it or rent it rather than lose it. In an apartment or home rental situation you can be evicted with no recourse other than to try to find another rental. And without good references, that can be very difficult. Likewise it is important to keep your credit in good standing in order to get a better mortgage rate the next time around.

Beyond the mortgage complications you will need to consider getting the best deal on the purchase price. You need to keep the emotional aspect out the purchasing process because the more emotional you are about the home, the more you are likely to pay. With a rental, the monthly fee is typically not negotiable. The purchase of a home typically is negotiable. Contact Stewart Real Estate concerning buying and renting so that you are familiar with any parameters that affect the purchase and financing as well as any rights you may have as a tenant. These are additional factors to consider when weighing the pros and cons of renting and buying a home