buy or rent a home

Are you encountering a significant life change? Divorce, bankruptcy, job transition or starting a new business, for example, would prompt a person to think maybe it would be better to rent until the dust settles. Trying to wrestle with the many consequences of any crisis life can hand out is difficult enough without adding the many decisions and complications of buying a house.

What is your financial situation? Practically all experts advise that buyers should be ready to devote 25-30 percent of their gross monthly income toward the purchase. If you can't, renting is for you. The lower you can make that percentage, the better off you will be, of course. But getting entangled in a mortgage and associated fees and taxes without sufficient other funds and revenue can be a confining — even devastating — experience.

So, before even getting into the specifics of whether you can afford to buy, define your lifestyle framework and whether ownership fits your profile. If you then see yourself as a prospective buyer, move on to the next series of considerations. Homeownership has certain advantages. But it also has disadvantages.

Here are some factors weighing against buying:

• Loss of options for a substantial amount of your money. The minute you commit to paying a mortgage for 20 or 30 years, you forfeit all other alternatives for investment of that resource — except by taking out a home equity loan to enhance the value of your property.
• Money spent at the time of purchase. Closing costs can amount to about 2 percent of the price of the home. That is money you will never recover.
• Mortgage interest. Even with today’s attractive loan rates, the cost of interest will double the amount you eventually pay for the house.
• Property taxes. How much tax depends on the value of your home and where you live, but the generally accepted expectation is about 3 percent of the value of the home. (Incidentally, while renters don’t pay property taxes directly, the taxes are included indirectly in their rent, so the renter does not escape this obligation, either.)
• Homeowners insurance. This can be a large amount of money — much larger than renters pay for rental insurance. However, remember that renters are insuring a far smaller entity. If a home is destroyed by fire or weather, the payback is much bigger than for the contents of an apartment.
• Maintenance costs. The average for a homeowner is said to be about 1 percent of the property’s value per year. Appliances, flooring, landscaping, painting — all the things that require attention fall to the homeowner. Not to renters.
• One other factor to consider in the purchase of a home is all the things you would eventually buy to complement the place. Furniture, appliances, wall decorations — they and more add up to money committed strictly to being able to live in your house.

It might seem, after all of this, that anybody who buys a house has made the mistake of a lifetime. Not so.

For those who fit the previously discussed profile of an ideal home buyer, there are overwhelming advantages.

• Perhaps the biggest is that, while you are paying your monthly mortgage, you are building wealth, rather than just handing it to a landlord to build his. Real estate has equity, even if you don’t plan to use it. In 2010, the Federal Reserve did a survey that showed that the median household in the United States had $77,500 in net worth. That includes all the family’s assets. But, of that $77,500, $47,500 comprised home equity. Everything else added up to only $29,800 — stocks, bank accounts, cars, equity in private businesses, etc. A family’s home is, in fact, its most valuable asset, in most cases.
• Furthermore, the same survey found that the median net worth, counting all possessions, for a family owning a house was $174,500. Net worth for a family not owning a house was $5,100. That survey covered all demographic categories. What this says are that, when a family owns a home, that forced saving provides equity. Without that forced saving, the money goes here and there — squandered, some would say. Vacations? More dinners out? That extra TV upstairs? — without a means to put substantial amounts away for the future.
• The place belongs to you. You have unbridled freedom to do whatever you want to your own home.
• Meanwhile, every month, your home is appreciating in value. How much depends on the economy of the day. But you know that you are making money on the purchase of your house, unless it is in obvious decay or a badly failing neighborhood.

So the overall conclusion must be that, if you fit the profile of a home buyer, going through with the transaction will almost certainly benefit you in the end, so long as you buy wisely.