Monday, November 5, 2007

More than Money: Considerations for Rent vs Buy



While being a homeowner is the quintessential American dream, finding the right time to buy can be a challenge. Owning a home is likely the largest investment a person makes in their lifetime. Performing a "Rent vs Buy" analysis looks at not only the financial factors involved but the overall value of home ownership versus renting.

With so many factors going into a home purchase: finances, lifestyle, employment and personal goals, it's critical to run the necessary due diligence. Every potential homeowner should run a buying versus renting analysis to determine if the time to buy is now, or if renting is a more prudent decision. Here are the factors to consider when running a buy versus rent analysis:

Can You Afford It? A Cost Comparison

This question is a bit more complex that it might seem. Often, potential buyers stack the mortgage payment alongside the monthly rent and consider the comparison complete. But buyer beware: there are many overlooked costs associated with home ownership. Financing, homeowner fees, property taxes, repairs, and maintenance can add up quickly. On the other hand, mortgage interest on both first and second homes are tax-deductible which make homeownership one of the best ways to trim your tax bill.

In today's market, shopping around for a competitive interest rate is necessary for solid financing that works with your budget. What you can afford will be greatly impacted by how much money you can borrow, and at what rate you are borrowing. One thing to keep in mind is that like most markets, the mortgage market is very dynamic.

Good credit and a low debt to income ratio will help to secure a lower rate and make the cost of borrowing less in the long run. A good mortgage broker or loan officer can be a great help to a prospective borrower. If a borrower is financially savvy, they could also shop around for the best rates themselves. Anyone with a less than stellar FICO score (680-700 and above is generally considered excellent) could be lumped into what is known as the subprime mortgage category. If they cannot provide full documentation of their income and/or assets, and have less than stellar credit, then they will almost certainly be categorized as subprime. First time home buyers sometimes fall in because they haven't established credit. People with existing mortgages who have had late mortgage payments in the past or a bankruptcy might also be subprime. The easiest way for someone to find out where they stand, in regards to credit, is to run a credit report. There are many different services on the web where this can be done for free, or consult a mortgage broker who can run a credit report and advise accordingly.

Not all types of property are created equal. Condominiums, townhomes, and other complex-style dwellings often carry homeowner dues that range anywhere from under $100.00 to several hundred dollars a month. These fees are imposed by the homeowner's association for upkeep of common grounds, gym, pool and laundry facilities and other community maintenance. Knowing these fees and what they include is essential to the final assessment of your monthly payment.

Property taxes too are a factor in determining what your monthly payment as a homeowner will be. Often, loans will have an automatic impound account embedded within the loan which will raise the monthly mortgage, but make this bi-yearly bill automatically accounted for. Taxes are determined by the type of property, property value and location.

One of the least considered factors in homeownership is both financial and emotional: the cost of repairs and maintenance. Bad wiring, plumbing, termites, shifted foundation: these are all the bane of a new homeowner's existence. Having a reputable housing inspector go over a prospective property can assist in determining the quality of the structure and help assess the need for repairs. Other overlooked costs include closing costs, which are usually about 1% of the total property value. On a $400,000 loan, these are numbers that cannot be ignored in the final analysis.

In spite of these costs, it may be advantageous to buy versus to rent, depending on the rate of increase on your rent annually. If rent increases at 5% per year the inflation might overrun a mortgage and its associated costs.

Homeownership

For many, buying a place to call your own is the ultimate financial goal. The nonfinancial value and personal sense of community a homeowner wins is a certain type of satisfaction. There too, are tangible freedoms such as the ability to change the decor or the structure of your home without a landlord's prior approval.

The actual value of non-financial factors will vary greatly. Lifestyle and personal preference will weight heavy in deciding not only when the right time to buy is, but also what type of property. If you are a young, unmarried executive who travels 50% of the time, owning an apartment in Manhattan might be better than a ranch in Montana. Family size, occupation, need for security: these are all tangible factors that weigh into the final decision of buying versus renting.

There are still, other considerations. As a homeowner, you are your own landlord. Repairs, maintenance,

and community issues are all the responsibility of the homeowner. If you are someone who prefers less responsibility and greater ease to move, buying investment property rather than a home to live in might be a better choice.

Regardless of the final decision, it is important to carefully examine your options when looking at buying or renting a home. Consulting a reputable mortgage broker in your area is the first step.

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