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Is It Better to Buy or Rent?
The market is ripe
for buyers right now. Interest rates, although
slightly higher than this time last year, are
still at an all-time low, and the National
Association of REALTORS® predicts that 2006 will
be the third all-time best year in real estate.
So naturally you should be telling your landlord
goodbye and saying hello to your dream home,
right? Not so fast. Certainly, owning your own
home has its benefits. But, is the dream of
homeownership really one you should pursue? It
all depends on your circumstance and needs.
Buying a home is
such a large investment, possibly the largest
purchase you’ll make. So, careful deliberation
should be made when deciding which is better for
you: rent or buy.
The advantages to
being a renter is that your monthly costs are
fixed. There’s little to no responsibility for
maintenance of the property. And, it’s easier to
pick up and move to another location. However,
the disadvantages are your rent typically
increases each year and there is no guarantee
that your lease will be renewed. In addition,
you don’t earn any equity nor will you reap the
tax advantages of owning.
As a homeowner, you
have the benefit of security and stability, as
well as the freedom to decorate and remodel.
Your property also builds equity and you get the
tax benefit. However, when the central heating
unit breaks or the roof needs replacing, the
repairs are your financial responsibility. And,
there is always the possibility of losing on
your investment if property values go down.
One tool you can use
in your analysis is a Rent -vs- Buy calculator
that you can find on Web sites such
Prudential.com. These calculators allow you to
compare the costs of renting and buying. In some
cases the amount you spend in rent may be about
the same or less than you would pay on a
mortgage. However, the tax benefit from owning
the home may provide significant savings.
You also need to
decide if can you really afford homeownership.
If you are on a tight budget it may not be wise
to have the added pressure of maintenance costs,
property taxes, and insurance. If your credit
rating is in need of repair, or you have a high
debt to earnings ratio, now may not be the time
to purchase a home. Although you may find a
lender, your loan may be at a much higher
interest rate using a sub-prime lender. You
might be better off taking another year to build
your credit score and decrease your debt.
Besides costs,
another factor to consider is how long you plan
to reside in the home. When you purchase a home,
there is a substantial initial investment
including the down payment, closing costs, and
renovations. It typically takes between five and
seven years to recover your initial costs. And
depending on your loan payments, it may take a
few years before you begin to see a return on
your investment.
Your lifestyle also
makes a difference for whether you should rent
or buy. Will you be able to afford the type of
property you want and continue to enjoy the
lifestyle you have? Are you starting or changing
careers or perhaps you are in a job that
requires you to move frequently?
Although homeownership has its benefits, make
sure it’s the right fit for you depending on
your financial and personal situations. |
