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5 Magic Points: Should I BUY or RENT my HOME?
by Tom Levine
Buying a Home is the American Dream. It is more than a
place you put your hat at the end of the day. It defines you, protects you, and
prospers with you. Yes, Home Ownership is a noble pursuit, but it always starts
with this first, important question: Should I buy or Rent my Home? The answer,
surprisingly, is not so obvious.
Now the question of "affordability" is
an important one, but that's not the subject of this article. We have a free
calculator at our website. You're welcome to use it. The subject of this
article, however, deals with the questions that must be answered, before a
renter can migrate into the magical realms of HOME OWNERSHIP.
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Here are 5 MAGIC POINTS that you need to examine, on whether
or not to BUY or RENT your next Home:
1.EXPENSES
2.COMMITMENT
3.MONTHLY PAYMENTS
4.TAX RETURNS
5.WEALTH
1.EXPENSES:
Renting a home requires that you give a check to the landlord each
month. That's it. You're done. Everything else is simply taken care of for you.
When you OWN a home, you are in business for yourself, and this means that you
must handle all of the expenses yourself.
a)You are responsible, of
course, for the monthly mortgage payment to the bank...
b)You must pay
all your utilities, including phone, gas, electric, cable, trash, water,
etc.
c)Don't forget your responsibility to take care of maintenance. Not
having enough money in the bank account is not a good enough excuse. If it's
broken, ya gotta fix it!
d) Don't forget your Homeowners Association
Dues, your Membership Fees, Property Taxes, Special Assessment taxes,
insurance…yada, yada, yada.
When you rent a home, you give the
landlord a check. When you buy a home, you must ensure that all expenses are
met and managed every single month, forever...
2.COMMITMENT:
Renting and Buying have different financial
commitments.
a)To rent a home usually requires a lease. Sometimes it's
month to month; sometimes it's a 12 month lease. But, no matter what, there's
always a way out. Your commitment is limited to the time you choose to stay and
reside there.
b) When you buy a home, you usually sign a 30 year
mortgage, which most people would argue, is like forever. You are committed to
ensuring that the payment is delivered to the bank or lender every single
month, on time. They don't care if you want to move at some point. You can sell
your home of course, but you can't just break your mortgage, like you can break
your lease.
Buying a home requires a long-term, financial commitment.
Renting a Home simply requires that you cut a check each month you reside at
the home of choice.
3.MONTHLY PAYMENTS:
It always appears
that a renter will pay less each month on monthly payments. Let me shed some
light on this subject. Examined closely, this is as far from the truth as the
moon to the Earth. Let's use an example:
a)As a renter, you pay $800 a
month, let's say, that increases 5% each year. The math may differ with you and
your landlord, but you get the idea. Barring rent-control, this is inevitable.
Simple enough.
b)As a Homeowner on a fixed rate loan at $1000 Principal
and Interest per month, the payment never changes…Never…Not
ever…
c) In other words, the renter's monthly rent will
eventually SURPASS the homeowner's mortgage payment…Much faster then you
might expect.
In this example, our Renter's Monthly Payments will exceed
our Homeowners Mortgage Payment, in about 6 years.
4.TAX RETURNS:
A renter usually does receive
a tax benefit from the State and Federal tax boards each year, sometimes
referred to as a "renter's credit". But the Homeowner receives a deduction on
the Interest paid on their loan. This is a huge benefit to the homeowner.
a)Let's use the same example with our $800 renter. At the end of the
year, our renter might receive a $600 renter's credit on their 1040EZ form when
doing their taxes. Simple enough.
b)Our Homeowner, on the other hand,
paid a total of $12,000 in mortgage payments, of which about $11,500 went
towards INTEREST. This INTEREST is a write-off.
c)Let's see…$600
versus $11,500. Hmmm. I like that math. That equates to a nice healthy tax
return for most of us, come April of next year.
Take those thousands of
dollars in tax return, and go on a nice Cruise around
Jamaica!
5.WEALTH:
It's arguably much, much harder for a
renter to build wealth. There is no built-in mechanism for appreciation,
whereas the homeowner has postured themselves wisely for the future.
a)Let's say we have a renter that wants to get wealthy. Great! They
must go find a business to run, or a stock to invest in, or come up with a
great invention, or be the next rock star, or follow a family friends "tip",
and go do Cattle Futures from August to September (just an example,
folks…I don't know anything about cattle…). In any event, most people
would be concerned that our renter is following the proverbial "pipe dream"
towards wealth.
b)But let's say we have a homeowner who wants to build
wealth. Great! What do they need to do? Simple….Nothing…Pay the
mortgage…Live in the house…Go work your job. That's it. Real Estate
appreciates in value, on average, over the long haul, like no other financial
vehicle. It is a virtual certainty, and it is automatic. The homeowner controls
the total value of the home. That's the magic of leverage.
c) Let me
drive the point home: Someone might buy a house at $150,000, let's say, and
over the course of 7 to 10 years, it is completely reasonable to suggest that
this very same house could be worth around $600,000.
Renters do not
have a built in advantage for building wealth, whereas Real Estate appreciates
in value as a virtual certainty. They don't call home-ownership the "American
Dream" for nothing!
SUMMARY:
The subject of deciding on
whether to Buy or Rent, is not simple. In the end, it boils down to a question
of complexity. Being a Renter is simple. Being a Homeowner is more complex, and
yet, that does not mean that it is not within your grasp. It IS!!! There are so
many people that are just waiting in the wings, yearning to help you get there.
Real Estate Agents, Mortgage Brokers, Friends, Family, etc.
With all of
these resources around you, just about anyone can own a home, and in this great
country, the American Dream of Home Ownership is completely within all of our
grasps!
But do me a favor. Give yourself the time to examine these
important questions first. Look within. As we all get older in life, we yearn
for more. Buying versus Renting is a common theme in this journey. As we wave
goodbye to the younger years, we say so long to the simplicity of life, and we
say hello to the promise of prosperity, wealth, and a better tomorrow. We also
say hello to higher, more complex things. Often times, it's simply the
willingness to accept complexity that will get you to the understanding you
need.
Best of luck on your journey, from Renting to Owning your next
Home!
We've enjoyed providing this information to you, and we wish you
the best of luck in your pursuits. Remember to always seek out good advice from
those you trust, and never turn your back on your own common
sense.
Publisher's Directions: This article may be freely distributed so
long as the copyright, author's information, disclaimer, and an active link
(where possible) are included.
Disclaimer: Statements and opinions
expressed in the articles, reviews and other materials herein are those of the
authors. While every care has been taken in the compilation of this information
and every attempt made to present up-to-date and accurate information, we
cannot guarantee that inaccuracies will not occur. The author will not be held
responsible for any claim, loss, damage or inconvenience caused as a result of
any information within these pages or any information accessed through this
site.
Tom Levine provides a solid, common sense approach to
solving problems and answering questions relating to consumer loan products.
His website seeks to provide free online resources for the consumer, including
rate-watch, tips and articles, financial communication, news, and links to
products and services.
Visit
Loan-Resources.Org , or you can email Tom at
info@loan-resources.org .
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