Things You'll Need:
- The financial ability to buy or rent a house.
- A 5-year plan
- A computer
- A telephone
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Step 1
First, take a look at the reasons why you want to buy a house versus renting a home or apartment. Is it because you want to have a place to call your own, or you think it is a good investment, or someone has told you that buying is what you should do? Well, for the most part, the one reason that is most valid is that you want a place to call your own. There are certainly plenty of homes for sale at lower prices than we have seen for a while and interest rates are at historical lows.
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Step 2
Before addressing the issue of whether owning a home is a good investment, let's evaluate whether or not you can afford to buy one. Remember that the home foreclosure rate is at a 40 year high and that 100% of those homeowners were once qualified for a mortgage. Keeping that in mind, go online and find a mortgage calculator. Once you find one, put in all the numbers it asks for. You will need to know the price of the house you would want, your down payment, the interest rate you expect, and an estimate of taxes and insurance. Plan on having at least 10% to put down plus closing costs. Not only have mortgage loan and down payment requirements gotten tougher, but in all honesty, if you cannot save enough money to make that initial investment, you will probably not be able to keep up with your mortgage and costs associated with owning a home. This is not like paying rent. Not only do you have the mortgage but you also have at least 40% extra for taxes, insurance, condo fees, and upkeep. Add on top of that the extra furniture and appliances you will need, and you can see that this is not comparable to renting.
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Step 3
So is all the extra expense in owning a home versus renting a house worth it? Isn't it a good investment? It might be an OK investment under certain circumstances, but this is not the way to build wealth. Let's look at some facts. Since 1994 when home prices were fairly low, an index of home appreciation in the top 10 cities shows an average annual rate of return of 4.7%. During that same period, inflation was 2.5%. That leaves a net return after inflation of 2.2%. This does not factor in the costs of maintenance, fees, taxes, and insurance that can run about 2% a year. Government bonds and CD's, even today, can do better than .2% return and even 2.2% return. Any tax benefit that you receive will not make up the extra expenses per month that you will spend because you own a home versus rent it.
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Step 4
A few more factors to consider when you are trying to decide to buy or rent a house are your lifestyle and the time frames you are working with. Are you a homebody, a gardener, a fix-it man? Home ownership may be perfect for you. Are you a traveler, a partier, or someone with more commitments than time on your hands? Then home ownership may not be right for you. Unlike a rental situation where someone else is responsible for repairs and maintenance, when you own your home it is yours to see to. Another consideration is how long to you plan on living in the home? If you plan on staying more than 5 years, then you will have a much better chance of recouping the costs required to get into the home in the first place. Anything less than that and you may have to bring money to the table, or at the very least, not make back your out-of-pocket investment.
Comments
billips said
on 6/4/2009 Excellent article - as you say, both buying and renting have advantages and disadvantages so it definitely is worth not rushing your final decision - B.
JeannieKerns said
on 5/30/2009 Great information on buying or renting a home !
dorigillman said
on 5/30/2009 thanks for your advice.
whoodo said
on 5/30/2009 This is a very topical article and provides some pertinent information. Especially for those thinking about buyin in this current bad economy.
tracysmith159 said
on 5/30/2009 Good article. I just bought my home. That is becuase I plan to live most of my live here.