Should You Buy a Home or Rent?
Owning a home is one of the main goals for nearly everyone. However, one question that many people fail to ask is “Can I afford the home I want to buy and the costs that go along with it?
Buying a home is perhaps the largest and most expensive purchase you will make. This section takes a look at the plusses and minuses of owning a home and will help you to determine how much home you can actually afford.
The Home Buying Decision
It is impossible to know what the future will bring in terms of your finances and circumstances. But, by understanding the things you may run into along the path to home ownership, you will have a much better chance at making the right decisions and avoiding costly mistakes.
The Financial Differences Between Owning and Renting
In terms of pure investment strategy, buying a house is probably not the best path to take. Stocks and Mutual Funds have consistently outperformed home values over time. Home price appreciation is usually in the low to mid single digits where market based instruments can usually perform in the high single to double digit return range.
One area that home ownership does provide enormous benefits is with the tax advantages it provides. Mortgage interest and taxes related to real estate can provide you with significant deductions to your taxes. During the initial years of your mortgage is when you see the biggest benefits since most of the payments you make are for interest and not the principal balance of the loan.
Bright Side of Owning a Home
Home owners also are able to build equity in their home over time. This happens as values increase and the amount you owe shrinks. The other major benefit is that once your rate is locked in, the amount you pay for housing is stable if you have a fixed rate mortgage where your payments cannot increase.
The Not So Bright Side of Ownership
When renting, any damage or issues that come up related to the property, the landlord is there to fix them. When it’s your house, the problems and the fixes become your responsibility. By investing all of your money into a down payment on your dream house, you may not have the financial resources to fix problems that may come up.
You also may want to put off a purchase for other reasons. If you do not have job security or plan to leave your current occupation in the near future. Monthly payments, closing costs and other fees can put you in a bad position if these things apply to you. Also, if you wind up having to move quickly because you cannot cover all the costs, you may lose some of your initial investment.
Other Options
Lease to Buy, Seller Financing and Deed Contracts are other, less known approaches you should consider prior to making a buying decision.
Seller Financing
Using this approach, the person selling the house lends the buyer enough money to be able to purchase the home. This may be part of the purchase price or all of it.
For Example:
Buyer and seller have agreed to a purchase price of $200,000. Most banks would require you to put 20% down and then issue you a mortgage for $160,000. If the buyer has only $20,000 to put down, the seller could essentially issue a second mortgage to the buyer in the amount of $20,000. The buyer would then make two payments: one to the bank and one to the seller.
The benefits of this arrangement are that it can reduce the amount of money needed to buy and also knock the closing costs down a bit. Sellers are usually more accommodating with those who may not meet the bank’s stringent requirements.
The negatives are seller terms often have a higher interest rate and shorter payback timeframe. Many also require a balloon payment which is where initial payments are calculated on a 30 year payback schedule but after a shorter period (10 years), the entire remaining balance is due. If this happens, you are usually forced to refinance or sell the home if you cannot find an acceptable payment amount.
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