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Wednesday, February 24, 2010

To Buy or Not To Buy A House

Buying a home is a huge deal, and there is something very satisfying about having a place to call your own. Plus there are supposedly various advantages to owning a home, you can deduct the interest from your taxes, and when you move on you can get some money out of it (provided you can sell it on good terms.) But buying a house is not for everyone.
I like to read finance blogs. However, one common idea that I have found on many of them is that buying a house is a bad idea.'Americans are silly for believing that purchasing a home is the American dream.' 'You save so much money if you just rent.' 'You don't have to pay closing costs, repairs, taxes, etc, if you just rent.' 'If you invested the money you're spending on your mortgage you'll gain so much more than you can profit from selling your home.' I'm not a financial expert, but I beg to differ with some of these.
 Yes, when you purchase a home you are now responsible for repairs and taxes. And each month you are probably paying a significant amount of interest. However, when you rent you are paying the same costs, just indirectly, through rent. If your landlord has a tax increase on his property, he is going to pass that on to you in the form of raising the rent. The same goes with all those other various maintenance costs. Also I've heard that you could be saving that money and investing if you didn't have a pay a mortgage. Sure, that's a great idea if you don't mind living in a cardboard box. In reality you have to pay for living costs whether it's to the landlord or the mortgage company.
 I think the key issue when it comes down to deciding whether to rent or to buy is direct cost. I found this great quote by Suze Ormond, which I think says it well. "In Young, Fabulous & Broke, I said real estate is one of the best investments out there. If you purchase real estate in the right way, it will pay off in the long run. The right way is, when you purchase real estate, you have to say, what does an apartment rent for versus what can you buy something for. If you buy something and can’t rent it out for anything close to the mortgage payment, including insurance and other costs, then real estate is overpriced. Have you lost your mind? Not, “Did you qualify for a mortgage?” Not, “Did you have enough money in your emergency fund?” If you had simply done your homework to see, what does the same thing rent for, then you wouldn’t have gotten caught. But people just bought real estate thinking it’s a good investment. People, don’t be so stupid."
 When my husband and I were still newly married we decided to buy a townhome. The biggest reason was that where we lived purchasing a home was much cheaper than renting. At first our mortgage each month was easily $300 less than what we would have been paying for rent (towards the end it was closer to $600 less, and our utilities were also significantly less than we were renting.). We sold our townhouse in the middle of the economic crisis, and yes, we sold it for $70-90K less than we would have gotten for it a year earlier, but we still didn't sell it at a loss. When you figure in closing costs we about broke even, we were just happy to be able sell in the economic situation and move to where my husband's new job is. So real estate was not a magical money making answer for us, but the key is that we were saving at least $300 each month. With that money, my husband graduated without any debt, we paid off our car and had two kids in the mean time. If we were renting I don't think we would have been able to accomplish that.
 However buying a house isn't for everyone, if any of the following applies to you, I would think twice about purchasing a home right now:
  • You plan on being in one place for less than two years.
  • You can't afford it.
  • Your income is unstable.
  • You can't put down at least 10% of the purchase price.
  • You haven't done research on your purchase, rent prices, loans and interest rates.
  • You have bad credit and/or overwhelming debt.
  • Housing prices have been sky-rocketing and you're at the top of a bubble. (Of course this is much easier to see in hindsight.)
This article on I Will Teach You To Be Rich is a good starting point for your research. (Although he tends to lean towards anti-purchasing.) He lists several resources to get you started.

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