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We've learned just about everything you need to know when considering leasing (renting) a house, renting to own a house or buying a house.
There are a lot of things to consider.
Buying
vs. renting
"
Should we continue renting or go ahead and buy?" That's the question
hundreds of thousands of Americans ask themselves every year. It's not
an easy one to answer. Emotions, family and personal reasons all come into
play in any home-buying decision.
No one knows what the future holds for you, your family, your job or your finances. But we can help you understand what you're going to encounter when you embark on the sometimes-difficult journey toward the American Dream of owning a home.
Economic
differences between renting and owning
If you're looking for the best return on your money, historically you're
better off investing in the stock market than buying a house. Primary
homes generally don't earn the investment return of financial instruments
such
as mutual funds. While the stock market's long-term average rate of
return is in the range of 8 percent to 10 percent, housing has appreciated
on
average in the low- to mid-single digits for many years. That means
you shouldn't buy solely to generate an investment gain.
On the other hand, Uncle Sam helps out by letting taxpayers deduct part of the mortgage interest and real estate taxes they pay each year. Borrowers get the benefit only if they pay enough in one year to exceed the standard deduction. But that usually happens, especially during the first few years of a mortgage when most of each payment goes toward interest rather than principal.
By the numbers ...
Say someone with gross annual income of $50,000 bought a home using
a 7 percent, 30-year mortgage of $150,000 on Jan. 1, 2002. The
monthly payment
would be $998, excluding taxes and insurance, and this year, that
borrower would pay $9,585 in interest. If he didn't have the mortgage,
he would
take a $4,700 standard tax deduction on his 2002 tax return (assuming
he was a single filer). But by itemizing his mortgage interest,
he would
have
$4,885 more to subtract from his income.
Sunny
side of homeownership
Owners enjoy other benefits, too. They build equity over time as
home values rise and their mortgage balances shrink. They also
don't have
to worry
about their housing costs shooting through the roof because mortgage
lenders can't boost borrower rates and payments, unless those
borrowers have adjustable-rate
mortgages.
Cloudy side of homeownership
When something breaks at an apartment, it's the landlord's
problem. When your name's on the deed, it's yours. Someone
who throws
every penny into
a down payment just because homeownership sounds like a good
idea is taking a big risk because there's no money left to
fix leaky
pipes or buy a new
air conditioner.
Ready to find a mortgage? Check rates in your area.
Potential buyers may want to hold off for other reasons. Workers on shaky ground with their employers or those who don't think they'll be able to find jobs nearby if their firms go belly up might want to wait on getting mortgages. The same goes for people who plan on leaving a job soon. The monthly payment isn't the only obstacle for this kind of customer. Closing costs and other home-buying fees, as well as the commission that most owners end up paying to real estate agents when they sell their homes, add up. People who have to sell after living in one place for only a short time can end up in the hole on their investments.
Explore
all the options
Some middle-ground approaches to homeownership blend elements
of buying and renting. Some of the more popular loan types
are seller
financing, "lease
with an option" and "contract for a deed" plans.
Seller financing
In seller financing, the buyer buys a $150,000 home by
taking out an $80,000 bank loan, putting $10,000 down
and getting
the seller
to "carry back" a
$20,000 second mortgage. The buyer makes payments on
the first loan to the bank and the second loan to the
seller. That second mortgage from the
seller usually comes with a higher rate, a shorter term
and a potential balloon payment. Or, the seller can hold
the entire mortgage and the buyer
makes payments directly to the seller. Pro: It reduces the cash needed
to get into a home and could reduce closing costs.
Con: There are two monthly mortgages payments and the
seller determines the interest rate for the second loan.
Lease
with an option
In a lease with an option, the buyer leases a $125,000
home from the seller for 12 months at $1,200 a month,
with $200
a month
going into
a savings
account for a down payment and $1,000 going to the
owner. Before moving in, the would-be buyer pays maybe
4 percent,
or $5,000,
of the purchase
price upfront that goes toward the down payment. At
the end of one year, the buyer gets the home with $7,400
down (his
$5,000
upfront
plus his
savings account) and a regular loan from a bank that
pays off the seller. Pro: It's good
for people who don't have a lot of cash, plus you get
to "wear" the
house before you buy it.
Con: The seller owns the home during
the lease period.
Contract for a deed
In a contract for a deed, the buyer arranges a contract
with the seller. The buyer makes payments to an escrow
agent,
who holds
the deed to
the property. After 180 months or some other term
of payments to the escrow
agent, the seller tells the escrow agent that payments
have been made, and the escrow agent gives the buyer
the deed.
No financial
institution
is involved. Pro: It reduces the
closing costs.
Con: A buyer who defaults before
fully owning a property can be treated like a tenant
and evicted.
As you click around the site, make certain to visit the heart of our resource selection, our special house-hunter section which helps you target your search of Internet sites and opportunities to save both time and money.
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