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Renting Versus Buying a Home - Questions to Ask

By - 2009

To decide whether renting versus buying a home makes sense, ignore the biased advice of those who think it is always better to buy a house. Consider the important questions you need to ask instead, including the four that follow.

1. Will you be there long enough?

You'll normally be better off renting if you will be moving in the next few years. This wasn't true during the last real estate bubble, when home values in some areas went up 20% or more each year, but then some of those who timed it wrong and bought in the summer of 2006 saw a 20% decline in value in the months that followed. You don't want to be facing a move when you owe more on your home than you can sell it for, so unless you like to gamble, consider buying only when you'll be in the home for at least a few years.

2. Do you know the real costs?

The various costs of owning include the mortgage payment, taxes, insurance, utilities (guess if you have to), any immediate updates or improvements you'll be making, and a reasonable amount for maintenance and repairs. Start with those numbers to figure the total average monthly cost of owning the home you're considering. Then answer the next question so you can compare options fairly.

3. What's the cost of renting?

Rent plus perhaps renters insurance (optional) plus utilities (guess) gives you a basis for comparison. If buying is dramatically more expensive, it may be better to rent and bank the difference for now.

A few years back we lived in a city where the same home that sold for $160,000 could be rented for $750 per month. The total cost of owning would have been about $1,250 per month. If a person had bought such a home then, it would be worth about $130,000 now (that was the top of the market). Banking the $500 per-month difference would mean almost $20,000 saved in a few years time. Notice that even if the home values had risen somewhat the person may have been better off renting. As it is, the cheaper price today, plus the savings, would put him $50,000 further ahead because he rented.

Now it's true that some of that mortgage payment would be principle, not interest, so some equity (not much) would have been built up even without a rise in value. But if the home were sold now, there would be expenses associated with that sale, eliminating any equity gains. Of course rents can rise too, while a fixed rate mortgage payment will remain the same. This all gets back to the first question about how long you'll be living in a city or neighborhood. The longer the time, the more likely it is that buying makes more sense - but don't skip the next question.

4. Are you ready for the responsibility?

Renting versus buying a home can be the smart move at times, but even when buying puts you further ahead financially, that's not always the final consideration. My wife and I like owning a home in large part because of the financial advantages, and we plan to stay where we are for a long time. Otherwise we might be renting, because I don't actually like taking care of a house and yard.

This is a serious issue to consider, even in situations where buying has a clear asset-building edge over renting. When renting, a landlord takes care of the roof, the heating system, the painting, carpeting, and possibly even the yard work. Al of that is in your responsibility when you own, along with buying and repairing large appliances, resurfacing the driveway, spraying for bugs, etc. Be sure you're ready for the time and money you'll spend as a home owner.

Most people probably should buy a home at some point. Your cost of owning a home usually won't go up as fast as rents, at least if you have a fixed-rate mortgage when you buy. Other advantages? No landlord can tell you to leave, and a house is a great way to build assets. As for the latter, consider that even when renting versus buying a home costs less each month, most renters really won't bank the money saved. Still, there are times and situations when renting makes sense.

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