Real Estate: Buying versus Renting
Renting to Own: Smart Questions to Ask:
1. Who will tend to the property and pay for routine maintenance?
2. Who pays for major repairs?
3. What are the costs of setting up and managing an escrow account for the portion of rent allotted to the down payment?
4. Will you manage the property yourself, or hire an agent?
5. What if the renters change their minds? Who keeps the money in the escrow account?
6. If the buyers change their minds, what will be required to put the property back on the market?
1. How much of the rent is going to the down payment?
2. How locked in are you if you change your mind?
3. What will it cost you to get out of the deal?
4. How long will it take to accumulate enough of a down payment that you are likely to qualify for a mortgage?
From Freddie Mac’s Guide to the Homebuying Process
There are many great reasons to consider owning a home:
1. You’ll have a place that is yours! You’ll own it, have a place to raise your children and become a part of your community. You can pass your home down to your children, and their children, creating security for generations to come.
2. You may pay less to own a home than you would to rent – and it’s yours at the end!
Homeownership can reduce the federal income taxes you pay. You can deduct the interest on your home mortgage and property taxes you pay on your home on the tax returns you file each year. These tax savings partially reduce, or offset somewhat, the actual cost of owning your home.
3. Your monthly payments won’t ever go up if you choose a fixed-rate mortgage!
If you choose a mortgage with a fixed-interest rate (one that stays the same for the life of the loan, say 30 years), you’ll pay the same mortgage payment each month for the entire 30 years of the loan (if your taxes go up, your escrow will go up – increasing your monthly payment).
4. You’ll build a good nest egg!
Owning a home and building equity is the single greatest source of financial security and independence for the majority of people who’ve taken this step.
From the National Association of Realtors
Should You Buy a Home in Today’s Market?
Thinking of buying a home? The question to ask is a simple one: How long do you intend to live there?
It rarely makes sense to buy if you expect to move within three years or less. That’s because of the costs associated with selling. Not just sales commissions, but the fact most how sellers rely on home appreciation to cover those commissions and to provide the down payment and closing costs when they buy their next home. Buying a home in an uncertain market when you expect to move before too long is a risk.
However, most buyers live in their home an average of seven years or more. If that fits you, it almost always makes sense to buy rather than rent, in practically any market.
Why? First, if you are thinking about delaying a purchase because you want to “time the market” to get the very best deal, that is almost impossible to do with precision.
Even if you are in an area with declining market prices, the most knowledgeable experts cannot reliably anticipate the “bottom” of a real estate market. Afterwards, they can look back and say, “The market began to turn in 1997,” like it did in some areas of California that had a tough market in the nineties. Before the turn, though, no one knows.
Second, if you aren’t an owner, you’re a renter. Renting is seen by many as just throwing money away. Renting provides no income tax benefit through itemizing deductions like property taxes and mortgage interest.
As a renter, you are limited on what changes you can make to your living quarters. As an owner, you can paint your living room chartreuse if you want or put in an avocado green carpet. You can change light fixtures, garden and landscape. You can do whatever you want that makes your home a comfortable place for you and your family.
It’s your home, not a temporary place to sleep and eat until you do buy a home.
Third, interest rates remain very low. Waiting could allow interest rates to climb higher. That means your monthly payment could be higher, too. No one can predict rates that far in the future, of course, but rates are very low right now.
For most Americans, the easiest way to accumulate wealth is through home ownership. Three out of four people have more equity in their home than assets in retirement plans, stocks, mutual funds, and savings. Though no one can guarantee property will appreciate, over time it generally does. Over the long term, you can generally count on it. In the last five years, the median price of homes all across America increased in value approximately 10% per year. Usually, it’s not quite that high, and there are some areas that had more rapid appreciation in recent years and markets that have seen prices fall.
How do you minimize the possibility of lower appreciation for your home?
Determine your price range. Then choose a neighborhood where your target price is in the lower tier of prices in that neighborhood. That way, your home has less vulnerability on the down side and the higher-priced homes will help pull you up during hot markets.
Also, try to steer away from homes on busy streets or homes that back to busy streets. Buy a house as close to the center of the tract as possible. Try to buy in a homogeneous area, where all the homes are similar to one another. For example, if you are buying a single family home, you do not want to buy next to an apartment or condominium complex.
Finally, talk to a real estate agent and ask for advice. Ask them what the market is like in your area.
Best of all, there are lots of sellers right now. Inventory is high. If you make an offer, ask for incentives to buy that particular home.
If you are putting ten percent down or more, you can ask for up to six percent of the purchase price in incentives. These incentives cannot be rebates of cash or help with down payment, but you can ask the seller to pay your closing costs. Talk to a real estate agent. Have that agent recommend a lender who will talk to you about incentives and explain what you can request.
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