Buying a house is more complicated than just having the money for the down payment and monthly mortgage. Owning a house requires a tremendous commitment of funds, time, and attention. For some people, owning is not the best or only way to have a comfortable and safe living environment. Consider the pros and cons of renting listed below.
Renting a Home
For some families, renting is the best solution. You may not be ready economically or emotionally to own. Some people consider renting a temporary way to live until they are more settled in job or family.
Renting can mean benefits such as:
- The owner handles maintenance and repairs.
- Moving is easy (if necessary you can move within a short time).
- There is no large down payment, only a security deposit.
- Moving-in costs are low.
- Amenities may be available (pool, tennis courts, social/activity rooms, laundry facilities, security for apartment renters).
- Some monthly expenditures (rent) are fixed making it easier to budget.
- There is no chance for financial loss of investment (beyond the amount of the lease).
- There is a sense of security from nearby neighbors.
- It is easier if you travel a lot, either for your job or pleasure.
- You have few responsibilities.
However, renting has some disadvantages:
- It offers no special tax deductions.
- You will probably have restrictions on noise level, pet ownership, or children.
- There are no potential gains from the rising value of the property.
- Changes cannot be made to the property or are limited.
- You usually get less space for the same money if spent on a house.
- Rent rises with inflation except where there are many rental units available. The competition from other lessors keeps the rent low.
Owning a Home
If you are thinking about buying a house, consider the following advantages:
- A house is a form of forced savings (you make payments on an asset that may grow in value–many families would never accumulate assets otherwise).
- Monthly payments remain relatively constant for many years (fixed loan), thus housing costs are stabilized because present and future costs can be estimated and planned.
- Homeowners often have a sense of pride and status in home and community.
- Ownership may contribute to security, especially in retirement years when income normally decreases.
- A homeowner can borrow against his/her equity, as the value of the house increases against what is owed on it.
- A homeowner may have a better credit rating (equity in a home improves the credit status of the family and can be used as collateral for an emergency loan).
- Mortgage payments contribute to an investment, particularly if the property is located where it increases in value over a period of years.
- Home ownership can contribute to the general well-being and sense of “roots” of the family, especially for children.
- Interest on mortgage monies and taxes are legitimate income tax deductions.
- The house may increase in value, resulting in a significant gain in net worth.
- More space may be available for family members and their activities.
- A homeowner has freedom to make improvements and changes to the house and surroundings as desired (although a development or association may have restrictions and prohibitions).
- Homeowners generally are concerned about community affairs and how they may affect their property.
The disadvantages of home ownership may outweigh the advantages for some people because:
- A substantial down payment is needed.
- A house requires a big commitment in time, emotions, and money.
- The house may decrease in value if the neighborhood deteriorates or changes quickly; thus resale may be a problem.
- Real property taxes could increase dramatically.
- The homeowner may have limited money for other purchases or activities since his or her money is tied up in the house.
- Security may be a problem if you travel a lot.
- Maintenance and repairs may be costly and take a great deal of time and effort.
- The house may be too large after children leave home.
- Some families have difficulty budgeting for maintenance, repairs, home improvements, and/or home ownership dues.
- Total housing costs may take too much of the budget, resulting in potential cash flow problems.
- The family may have higher moving-in costs, as new items may have to be purchased for a house.
- The family may feel less secure if neighbors are not near.
- Unexpected loss of income due to job termination or unemployment may limit money available for home ownership costs.
- Owning a house requires money for insurance, and a loss of the house as a result of a natural disaster (tornado, flood, hurricane) could mean a serious financial burden.
Define Your Values
Sit down and list the factors about a house that are important to you. Look at what aspects will be the most important and if there is room for compromise. This list should include answers to questions such as the following:
1. What is a home to us?
2. Which is more important to us, the house or its furnishings?
3. How do the activities we are involved in affect the kind of house we need?
4. How far are we willing to commute for life activities, i.e. work or school?
5. How important is privacy to us?
6. How much time and energy do we have to devote to maintenance and upkeep?
7. What community services are available (garbage and trash pick up)?
When Choosing a Home to Rent or Buy, Consider:
- Current residents (similar or dissimilar occupational and social interests).
- Whether the area is appreciating or depreciating in value.
- Safety and security.
- Convenience to work, shopping areas, school, and activities.
- Good roads and streets.
- Available public transportation.
- Police and fire stations.
- Health and sanitation services.
- Recreational facilities.
- Size versus amenities.
- Special features your family needs.
- Within your price range.
- Tax benefits.
- Energy costs.
The Apartment or House Itself Consider:
- Space, arrangement, and condition.
- Bedrooms and bathrooms.
- Kitchen and work area, adequate work and storage areas.
- Dining and living areas large enough for family entertaining and resting.
- Room sizes.
- Interior and exterior finishes, well or do they need work. If they need work, how much?
- Heating and lighting.
- Space Outdoors.
How Much House Can You Afford?
Buying a house commits your family to a long-term investment, or a long term debt, depending on your situation. Most Americans spend between 21 and 54 percent of income on housing. How much each family spends on housing depends on several factors.
Three basic considerations that can help a family determine how much house they can afford are:
1. The amount of take-home pay the family can reasonably expect.
2. The family’s living costs and other debt payments.
3. The total amount of housing expenses, including taxes, insurance, energy, furnishings, maintenance, and mortgage payments.
Because of rising prices and increased housing-related expenses, the old rules on how much to pay for a house no longer apply. Lenders usually follow two basic guidelines in determining how large of a mortgage to grant to consumers:
One: Principal, interest, taxes, and insurance (PITI) should not exceed 25 to 29 percent of the consumers gross income. Two: PITI plus other long-term debt should not exceed 33 to 41 percent of gross income. (Long-term debt includes car and installment loans, alimony, child support, and charge card balances that will take a set length of time to repay.)
The range the lender uses will depend on the size of the down payment. Lenders probably will use the 29 percent and the 41 percent figures if you are paying 10 percent down. If you are paying 5 percent down, lenders will probably use the more conservative 25 percent and 33 percent. Federal Housing Administration (FHA) loans use 29 percent and 41 percent.
These are general guidelines used by lending institutions. The prospective buyer should find out about these guidelines and then evaluate them according to their current standing in life.
To learn what your total housing costs might be, use this formula:
P + I + T + I = Monthly Cost
Principal + Interest + Taxes + Insurance = Monthly Cost
For example, a homeowner may have:
$750 + $75 + $50 + $25 = $900
NOTE: Insurance costs may include the homeowners policy required by most lenders and also mortgage default and term life. Ask prospective lenders what they include in insurance costs. Also keep in mind utility and maintenance costs. When shopping for an existing house, ask to see the utility bills for the last 12 months. Learn as much as you can about the condition of the house to see if repairs will need to be made. With a new house, monthly utility and maintenance costs can only be estimated based on similar houses in the neighborhood or those of a similar size, style, and construction.