Renters' Guide: Trading Rent For Mortgage Payments
Some people may be happy continuing to rent indefinitely to avoid the financial obligations associated with homeownership or to enjoy the benefits and flexibility of renting. For others, renting is a stepping stone to homeownership while saving for a down payment, waiting to purchase a home with a spouse or life partner, or waiting until one's career is stable. When making the decision to trade rent for a mortgage, certain factors should be considered.
The first thing to consider is whether or not homeownership is desirable – does the person want to buy a home? As mentioned, some people prefer the simplicity of renting and may not ever want to purchase a home. Lifestyle, family, debt load, job stability and the likelihood of a move to a different area are all factors that need to be considered before making any decisions.
Just like the standard investing advice "buy low, sell high," renters-turned-buyers may be able to time their home purchase to take advantage of real estate buyers' markets. Following the economic crisis of the late 2000s, for example, many homes sold for well below their pre-2008 prices. While this has been devastating to those selling their homes, it has provided the opportunity for many people to get into a home for much less than they would have thought possible (provided they could secure a mortgage in the tougher lending climate).
Real estate markets fluctuate in reaction to a variety of factors including global, national and local economic conditions, as well as tax incentives and interest rates. Potential buyers who have the flexibility to wait for favorable buyers' markets may be able to take advantage of reduced prices and lower interest rates.
Depending on the type of property involved and the particular loan one secures, down payments can range from about 3-20% or higher. For example, lenders may require up to a 50% down payment on certain condominiums that are not on the FHA-approved condominium list. People considering buying rather than renting need to have a down payment saved, and they be willing and in a financial position to use the money.
Rent Vs. Buy Calculators
An internet search for "rent versus buy calculator" will bring up several financial websites that allow people to input information to determine if renting or buying makes more financial sense (just remember, the calculators are intended for general information and educational purposes). Rather than providing a definitive answer, the calculators can help people get an idea of overall expenses for a selected time period by comparing the estimated costs of renting versus buying over the same period.
SEE: To Rent Or Buy? The Financial Issues
Equity and Tax Considerations
Proponents of home buying often cite the ability to build equity as a reason to purchase a home. In many cases, this is true. Equity takes time to build, however, and if the home is sold during the first few years of the mortgage, the owner may have built little or no equity in the property. If the homeowner plans on staying beyond those first several years, he or she will start to build equity.
Mortgage interest and property taxes are both deductible on the federal income-tax return, but only if the amount of itemized deductions is greater than the standard deduction. As such, this tax break should only be considered a benefit if one can take advantage of it.
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