Should You Rent or Buy?

An apartment management company was losing their tenants. Apparently, many of these tenants were infatuated with the idea of owning their own home. They were lured by unbelievable, cut-rate deals advertised by local builders in the Sunday newspaper. And they were leaving in droves.

The tenants were simply thinking, Lets stop throwing our money down the drain on rentlets buy a house. I was asked to speak to their apartment rental agents to address the issue. I told them:

According to The Wall Street Journal, contrary to popular opinion, renting can often be the better alternative, especially if theres a chance youll stay put less than five years.

Making the choice of home ownership, like making the choice to marry or to have children requires careful consideration. Generally, home ownership is a good idea. But lets take a look at the facts:

In the initial years of your mortgage, ninety percent or more of your monthly payment will be going toward interest expense. Over the life of a thirty-year mortgage on $150,000 at six percent, you will pay $173,757 in interest expense. This is real money and, as you can see, is more than the original price of the home.

On a thirty-year mortgage, it wont be until year nineteen that half of your monthly payment will be applied toward the principle. Until then, most of your monthly payment will still be spent on interest expense. As a homeowner, you will also be making payments for: Property taxes Homeowners insurance Utilities Maintenance Decorating Landscaping while possibly giving up amenities like swimming pools and other common areas.

Interest-only loans can be a great way to initially keep down your monthly payment. But youll only be paying more interest later on a higher balance.

What if property values go down? According to PMI Mortgage Insurance Company, the following metropolitan areas face the biggest pricing correction:
Los AngelesLong Beach, CA
SacramentoArden, CA
RiversideSan Bernardino, CA
Edison, NJ

And according to the PMI U.S. Market Risk Index report, these cities are also likely candidates for a downturn in housing prices:
Boston, MA
San Diego, CA
Long Island, NY
Santa Ana, CA
Oakland, CA

Nationwide, there is a 21.8 percent chance that overall house prices across the 50 largest housing markets will see prices fall.

Most of us have had the experience of owning a car that is worth less than what we owed on it. This is called being upside down or under water with respect to the auto loan. Similarly, you could have negative equity in your home, maybe trapping you in place for years. What if then you had to move suddenly? You would lose a lot more than just the few hundred dollars tied up in a months rent and a security deposit as you might if you were still in your apartment. Instead, you could lose thousands.

As unpleasant as it might be, be sure to read and understand all of the fine print of the mortgage. For example, is the mortgage you are being offered an ARM (adjustable rate mortgage)? If so, how often can the rate be adjusted and by how much? Is this just a teaser, below-market, short-term rate to get you into the property, with you possibly suffering the consequences of a much higher rate later?

If You Buy, Don't Buy a Starter House

Gary, the best man at my wedding, bought a house. It was a fine housefor a bachelor. After he started dating Pat and they decided to get married, Pat declared, This house will never do for the both of us. So Gary sold his house to buy their home.

Avoid buying the starter house. It may seem large now in comparison to your tiny apartment, but youll only be in the house a year or two before deciding to have children or deciding the house is otherwise too small. Instead, continue to save your money for a down payment on a larger house that you could comfortably live in for a half dozen or more years. Why go through the process of closing twice, moving twice, and all of the associated fees in such a short period of time?

Further, if you decide to move, you may pay a Realtor a commission to sell your home. At six percent, the fee would be $9,000 on a $150,000 home. The closing costs on a new mortgage could be another $1,500 to $2,500. Again, this is real money. You could have over $10,000 in move-related expenses, and the moving van hasn't even pulled up to your door yet.

Moral: Since the impact can cost you thousands of dollars, be sure to make decisions involving the selling of any house and moving both carefully and wisely.

From the book Kickback: Confessions of a Mortgage Salesman, one of the best-selling mortgage books on Amazon.com. Experienced mortgage broker, creator of one of the most informative home-buying educational seminars in America and author, Ted Janusz educates first-time home buyers and seasoned real estate professionals on the Top 10 Mistakes people make when obtaining a mortgage. For more information, please visit his website at http://www.januspresentations.com/. You may also email Ted at tjanusz@gmail.com.

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