In Layman's Terms: What Buying and Renting Mean Today

by | Aug. 31, 2008

Finances

Renting or Buying in 2008 But that's the trick--for those who can afford it. The housing market has too many factors to get into details here (and I promised you layman's terms), but the loans, debt, and mortgage aspects of buying a home are the culprit--not the house prices themselves, unless of course you're trying to sell. It's a great time to buy, as long as you can do it free and clear. And it will be an even better time in six, twelve, and eighteen months as experts are predicting a continued fall well into 2010. As long as the buyers are waiting, the prices will keep dropping. Once they start buying again, the market will turn around. Getting to where it's safe to buy again with a mortgage, however, involves the rest of those economic variables (gas is how much?) which are too unpredictable to count on. The bottom line--only buy if you have the money and you find a place you can't live without. In a normal economy, the advantages of owning outweigh the advantages of renting. For one, you get real estate tax write-offs; with these financial breaks, monthly mortgages look more like monthly rent. You also have the satisfaction of knowing that your property is gaining value; when you pay for your own home, you gain equity instead of putting out money to pay for someone else's home. Unfortunately, that isn't the case in 2008, and won't be for at least another two years. In some places it's cheaper to rent than own, sometimes by twice as much. Where mortgage rates are floating around 6.5 percent, rental rates are generally only 3 percent of the cost for the same thing. And since buying involves an additional average of 3 percent in taxes, maintenance, and insurance, owning right now is really three times the cost of renting. "It is a good time to rent due to the fact that sellers who can't sell their home, due to the market, are deciding to rent, which means that there are more homes to rent then before," says Joel Harward, Branch Manager at Security National Mortgage Company in Orem, Utah. "They are also willing to offer private contracts and leases with options to buy in the future. This helps those borrowers that currently cannot qualify for homes due to limited loan products and allows them to establish a rental history." But still, you can't get around the fact that while that is nice for your pocket book this month, in the long run you're still just throwing money away instead of putting it into something you own. We'll talk about up front expenses for buyers later on, but we need to mention here the out-of-pocket for renting: Plan on coming up with a security deposit that equals at least one month's rent, plus first and last month's rent. Typically, if you're going to be in a home for at least two years, the equity gained and the tax breaks available make owning worth it. Right now, however, you need to be planning on staying in that home for at least four years: two for the market to (hopefully) start moving back up, and two more for that equity to get you an advantage. But if you can do that, and if you can qualify for a mortgage loan, Harward suggests it would be better to buy. "There are more homes on the market currently then there has ever been, which means that the prices are competitive and sellers are motivated to sell." And with the record numbers in foreclosures, many lenders and banks have forced them to sell at discounted prices. When looked at from that perspective, it's great that housing prices are dropping! We want to get a good deal don't we? The thing that's getting too expensive is debt, so if we're in it, we're in trouble. And if we're not, we shouldn't start (I know, you hear this every six months). If you found a modest apartment, you could save the extra money for the next two to three years and be in a fairly good buying position right as the market bottoms out. If not, let's talk about mortgages. Mortgages Mortgage brokers usually use a 28/36 ratio to determine what sort of payments borrowers can make. They assume that 36 percent of your monthly income will go to all debts (including a mortgage payment) and that 28 percent of your income will go to the mortgage each month (or 28 of the 36 percent). Some mortgage plans proposed to you may include "specialty loans." Financial planners specifically suggest staying clear of one such specialty loan, the interest-only loan, which is usually suggested to young buyers; with this loan type, your monthly rate goes up tremendously after the interest-only period. In fact, the National Association of Realtors (NAR) describes most "specialty loans" as risky; if you're considering one, make sure to do your homework on the advantages and disadvantages of such a loan. FHA financing is another option that is becoming more and more popular. FHA stands for Federal Housing Authority and is overseen by The Department of Housing and Urban Development (HUD). The program was specifically started to encourage home ownership and loans are a lot more flexible, especially for first-time homebuyers. Getting prequalified for a loan is one useful exercise when considering if you want or can afford a mortgage. Prequalification is free, and it's helpful if you find a home you want. One of the potential problems buyers have is finding the home they want and losing it to another buyer during the qualifying process. Prequalification reduces that risk. By getting financial details sorted out before you start looking, you also know what price range you're looking for. Further, going through the process of prequalification prevents you from settling with a terrible mortgage rate because you didn't shop around. If You Buy: Out-of-Pocket Expenses Down payments and closing costs are fees that actually come out of a buyer's own pocket. Most first-time buyers identify collecting this money as the most difficult part of the buying process. Look at all your financial resources as potential provisions for these payments and start saving right away. The down payment acts as provision for the loaner should the borrower become unable to make payments. The industry standard for down payments has traditionally been 20 percent of the purchase price, but lenders have recently started providing lower down payment options because of sharp increases in home prices. Just remember: the bigger the down payment, the lower your monthly payments and interest rates. Carefully consider all the factors so you can put down as much money as possible while still providing for future needs and emergencies. You must also consider closing costs. The term "closing costs" describes a number of fees connected with transferring the title to the buyer. The list is extensive, so start saving early. Financial planners also suggest that you save at least three months of expenses saved in an emergency fund before you buy a house. After all you've done, you don't want to lose your house at the first financial crisis.
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