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"What Your Real Estate Agent Won't Tell You"
To Buy or to Rent. That is the Question.
A while back, I did an article called The Conspiracy of Home Loanership. In this article, I talked about the illusion of net worth, and how people have been tricked into believing that buying a home and living in it is a "good investment" towards retirement. With that being said, buying a home is not a bad thing. As a matter of fact, it can be a beautiful thing, but when is the right time to buy?
Don't buy a home simply because that’s what you’re supposed to do! There are many factors to take into consideration when buying a house.
Today I would like to present an article on Renting and Buying by Jay Peters.
Should You Rent or Buy? What Your Real Estate Agent Won’t Tell You…
Don’t ask a real estate agent if you should buy a home. It’s like driving into the muffler shop and asking if you need a new muffler. The answer will always be yes. Of course they want to sell you one – that’s how they make their money. In this article we’ll touch on whether you are better off buying a home or renting. We won’t talk about whether now is the right time to buy a home – that’s a whole other issue.
It’s a common belief that real estate is the best investment you can make. The last few generations of Americans have scrimped and saved so they could claim their piece of the American dream, complete with a white picket fence in the front, a garage on the side, and a garden in the back. Wait! Did you hear that popping noise? That was the bursting of the housing bubble, and the American dream right along with it. As many as 15 million families now owe more on their mortgage than their home is worth.
The whole “rent or buy” decision is made much more complicated by the shifting sands of today’s housing market. Do you think you want to become a homeowner? Don’t make that decision until you’ve answered these questions:
Question: How long will you be living in the home? If you won’t be living in your new home at least 5 to 10 years, you are better off renting. Why? The upfront costs of getting the mortgage are considerable (including “points” paid to the lender and more dubious fees than you image). And when you sell the home, you’ll be paying a real estate agent a commission of 6% or more of the sales price. It will take a number of years before those fixed costs are overtaken by an increase in the value of the home.
Question: How good is your credit? If you have a less than excellent credit rating you will be paying higher than average interest on your mortgage (if you can ever get one). Particularly in these times of tightening credit, lenders aren’t cutting much slack for those of us with average credit ratings. And just a 2% bump in the interest rate on a 30 year fixed mortgage on a $200,000 home will cost you $96,000 over the life of the loan. If you have a “bad credit risk” sign taped to your back, you’re far better off renting than buying.
Question: Do you have the cash for the down payment? The days of NINJA mortgages are over. You know what NINJA stands for, right? No-Income-No-Job-or-Assets. Even if you have a good income from a good job, if you don’t have 10% of the price of the home to put down, it might be better to wait until you do. Don’t fall for the “zero-down” trap of interest-only adjustable rate mortgages. After a brief honeymoon with interest-only payments, the rates may skyrocket, and if you can’t refinance you probably won’t be able to afford the monthly payments.
Question: Do you know the local market? Some areas of the country still have affordable homes for sale, and most likely will appreciate in value over the next few years. Others are tanking, and you could wind up financing a depreciating asset. According to the website HousingPredictor.com, the next real estate boom in some of the country’s hardest hit markets won’t happen until the year 2020 (so don’t hold your breath). A housing market analysis prepared by National City Corporation shows that the most UNDERVALUED HOUSING MARKETS were in Texas (can you say “Yeee-haww!) and surprisingly, in metro areas in the Northeast at some distance from the Washington/Boston corridor. Check out the detailed map at NationalCity.com.
Question: Do you know what comparable houses sold for? In these days of rapidly changing home prices, get a recent list of “comps.” Numbers don’t lie. Get the actual price that comparable homes in the area sold for recently. But don’t trust a real estate agent – get the data yourself from the city or county recorder.
Question: Can you afford the mortgage? Think about it; every single family that has lost its home to foreclosure, had at one time qualified for a mortgage! So the issue is not GETTING the mortgage, but KEEPING UP with the payments. According to RealtyTrac, there were more foreclosures filed in one month recently than new home sales. That’s a sobering statistic.
Question: Have you considered ALL of the monthly payments? The actual mortgage payment is only part of your monthly payments. You’ll need to add at least another 50% to 60% for items like mortgage insurance, property taxes, HOA fees, homeowners insurance, and maintenance costs when you’re calculating your anticipated monthly payments.
Question: How do you want to spend your weekends? If you’re the Mr. Fixit type of guy, you may love spending your spare time maintaining your home. But if you’d rather be fishing, each minute spent cleaning out your gutters will seem like an eternity. Remember, there’s no landlord to call when your toilet backs up or the furnace dies.
Question: Were you planning on a big tax deduction? It’s true that you can deduct interest on your home mortgage and property taxes when you file your return. But here’s a fact you might not have known: about half of all home owners get no tax break; either they own their homes outright, or their mortgage interest and/or property taxes are too small to itemize. Those in the higher tax brackets will find the deductions for mortgage interest and property taxes more worthwhile. The rich get richer.
Yes, buying a home is the right decision for some people. Those with the financial resources to afford the total cost, and those who will be living in the home for at least ten years will not regret their decision. They will most likely benefit from an appreciating asset. It’s not like buying a car (something that loses value every day you own it). Traditionally homes have gained in value over time – about 6% a year WAS the norm until recently. Some people benefit from the “forced savings” imposed by monthly mortgage payments. It helps them to not spend every paycheck on the “nice-to-haves.”
If you are still not sure whether home ownership is right for you, let’s do the math: We’ll assume you’re paying $1,200 a month rent now. You’ve been saving up and have $20,000 for a down payment on a home of your own. (Hey, congrats on that!) You find a home you want for $210,000 (that’s a little less than the average median home price in the U.S.). So you take out a mortgage for $190,000 (that’s the sales price of $210,000 minus your down payment of $20,000). It’s a 30-year fixed rate mortgage at 6%. That works out to about $1,100 /month. Hey! Let’s celebrate -- that’s less than your rent! Stop right there. Remember that your monthly mortgage payment is only part of the story. By the time you add on property tax, homeowners insurance, PMI insurance, maintenance, HOA fees, etc. your monthly payments are more like $1,700 to $1,900. So, if you have an extra $800 burning a hole in your pocket now after paying the rent, then maybe you can swing buying a home.
Here’s a typical story from Suzanne in Florida. As she writes in her blog (suzannesez.blogspot.com), she and her husband and son moved to Florida so she could take a great new job and be near her mother. They bought a nice home, and her husband looked for work. She came to hate her “great job” and found another, but at a lesser salary and without health benefits. The only work her husband could find barely covered the cost of day-care for their son. As Suzanne puts it “deficit financing may exist for the federal government, but not for everyday people.” Their mortgage lender wanted all the money owed, or the house; it got the house. Now they are renting a nice little home right around the corner from her mother. Suzanne says “It makes a lot of sense to rent – it eases the stress.”
Home ownership is still at an all-time high. But never forget the main thing you are buying along with “pride of ownership” is the RIGHT TO APPRECIATION. However, along with that right to appreciation comes something few people ever talk about … and that’s the OBLIGATION TO DEPRECIATION. As long as you have a mortgage you don’t actually own your home – you just rent it from the bank. Don’t let the American dream of home ownership turn into your own, personal nightmare. Yes, you can rent a home for less than you can buy it (after you take into account all the other expenses homeowners face today). This is particularly true if your credit rating is less than excellent. Why not spend some time and effort now to raise your credit rating, and then consider buying. I’m sure that real estate agent will wait for you…
Consumer Publishing Group is the publisher of the Credit Secrets Bible (in print since 1994) and the all new Debt Free Bible. For more information, visit their website at http://www.debtfreebible.com
Still looking to buy a home but credit is an issue. Learn how to improve your credit score now and you can save thousands of dollars over the life of a mortgage.
Here is another related article
I hope this has helped.
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