Rent vs. Buy

Buying vs. Renting a Home

By Elizabeth Weintraub

Words you will hear few real estate agents mutter: Not everybody should own a home! Some people aren’t cut out for home ownership, for a variety of reasons. Are you one of those who should rent and not buy? Here are some ways to tell.

Bad Credit Report

Does your credit report tank? If your FICO score is below 620, you’re not going to receive a good interest rate for a loan and, in fact, that kind of score could dump you into the hands of a predatory lender. Not a good sign.

·         If you want to buy with bad credit, you should work on fixing it before applying for a loan.

·         Four late payments is enough to disqualify you from obtaining a loan.
·         You can order your credit report free online.

High Debt Ratios

Lenders consider two ratios: front-end and back-end. The front-end is your mortgage payment, plus taxes and insurance divided by your monthly salary. The back-end adds your monthly debt payments to your PITI payment before dividing that total figure by your salary. A 50% debt ratio is a high ratio. A high debt ratiomeans you may not qualify for the loan. If you should find an unscrupulous lender that is willing to fund such a loan, you may not be able to afford to feed yourself, even if you eat dirt.

Job Instability or Relocation

How secure is your job? A high-rolling Sacramento buyer purchased a home in Midtown. His mortgage payments were $3,500 a month, which was a lot for a 25-year-old. However, that payment was affordable while this guy was earning an annual $120,000 salary. But when he lost his job, he also lost his home toforeclosure.

·         Is Your Job in Jeopardy?
Is your company laying off? Could you be fired and, if so, how hard would it be to get another job right away? Unemployment compensation is rarely enough to cover mortgage payments.

·         Relocation.
Are you likely to be transferred to another city within the next two to three years? If you had to sell due to a job transfer, your property would need to appreciate at least 10% to cover the cost of selling; otherwise, you would lose money on the sale. When you buy a home, you should plan to stay put for a while.

Maintenance Issues

All homes require upkeep and maintenance. Not everybody has the where-with-all, much less the desire, to tackle home repair projects. In addition, many first-time home buyers can not afford to hire a professional to fix things that break. Experts suggest you set aside 5% of the purchase price to cover maintenance and repairs when you buy a home.

When Renting Costs Considerably Less

If your mortgage payment would be triple the amount (or more) you would pay for rent, it might not make financial sense for you to buy. For example, if it would cost you $2,000 a month to rent what would cost you $6,000 per month to own, does it make sense to pay $48,000 a year more to own a home?

If you are in a 30% tax bracket, you might not come close to recouping the difference you paid. Say your deductible expenses are $5,000 a month; 30% of that is only $1,500, which would be your true tax savings per month. Would you spend $6,000 to save $1,500? For more information, please consult a tax accountant or CPA.

Renting or Buying:
Advantages and Disadvantages

If you are considering buying a house, one of the first decisions you need to make is whether buying a house instead of renting one is the right direction for you. Since owning a home is the “American Dream”, many people simply assume that it’s always to their advantage to buy a home, and for most, it is. Take a moment to review the following table to see how your situation fits in. Items in the green boxes are advantages and in the red boxes are disadvantages.
* More fixed costs for the
term of the lease
* Variable costs
* Not gaining equity,
but not losing it either
* Equity may go up, down, or stay stagnant
* When the lease is up,
you can just move
* If you want to move, home generally must be sold
* There is generally less work in maintaining a home or apartment
* Work needs to be done by you–or paid for by you
* Smaller amount of “up-front” cash
* Generally a larger initial investment–the downpayment
* No matter what happens with the value of the home, you will never gain equity
* Over time, the mortgage balance decreases and equity builds, even if the value of the home does not increase
* Limited–or no–ability to personalize
your living quarters
* The ability to remodel and redecorate the home to match your needs and desires
* No tax advantage to renting. Your landlord gets any and all tax breaks that are available
* There can be tax advantages attached to home ownership. Consult competent legal and/or accounting advice for details for your situation