Revisiting the Buy vs Rent Question
Whenever there’s an incremental fluctuation in home prices, it can pay off financially to revisit the “buy vs rent “question.
In the last 10 years, with the housing bubble at its peak, renting was a viable, and often by far the best, financial choice.
But, depending upon where you live, the tide may have turned. As housing prices continue their downward spiral, and foreclosured properties flood the housing market, purchasing may now be your best financial option.
If you’re interested in owning your own home, there are a number of things you’ll want to consider.
1) Determining if there are financial benefits.
- Find out if it’s become beneficial to purchase a home in your area.
The New York Times Buy vs Rent Calculator is a great way to do this. You simply enter the numbers, and a graph shows you whether you’re ahead or behind in the game, and by how much.
- Run a mortgage affordability calculator. Here’s one that works really well.
Mortgage Qualification Calculator
“Use this calculator to help you determine the most expensive house you would qualify for. Enter your monthly income, all monthly debt expenses (credit card payments, car payments, loan payments, and any other expenses), and information about your mortgage (down payment amount, loan term, interest rate, property tax rate, private mortgage insurance (PMI), and monthly association dues). This calculator will then show you the highest monthly payment you can afford and the highest priced home you can afford to keep your total monthly housing expenses less than 28% and your debt ratio less that 36% of you total gross monthly income. In general, most lenders do not want your total monthly housing expenses (including property taxes, private mortgage insurance (PMI), and association dues) to exceed 28% of your total gross monthly income. And your total debt ratio cannot exceed 36% of your total gross monthly income.”
Don’t allow yourself to go higher than these ratios, no matter what a mortgage broker might tell you. These numbers are designed to protect you over the long haul. Subprime lenders ignored these figures.
- Keep in mind that there’s approximately a 30% federal tax savings on your mortgage interest payments. This means that for every $1000 you pay in mortgage interest, you’ll pay $300 less in federal taxes.
I really like that last one.
2) Other considerations.
In addition to the financials, there’s a number of other questions you’ll want to consider before committing to purchasing your own home. Fannie Mae outlines some pros and cons, which I’ve included in a table at the end of this article.
But you should also make your own personal list of what’s important to you.
Here’s the “Home Sweet Home” wish list I made ten years ago, when I was considering purchasing my own home:
1) Space and privacy, but neighbors close enough to see from a distance.
- This meant I wanted a single family home rather than renting in a complex or purchasing a condo.
- Room for a dog or two and a small garden, but a yard small enough for one person to maintain.
2) Commute.
- 45-60 minutes could be my maximum commuting time to work.
- I wanted to be within 10 miles from the coast.
- I wanted to be able to get into Boston within an hour, and have access to commuter rail for that.
3) Affordability.
- Not house poor.
- Can handle any maintenance needs should I purchase.
4) Security.
- Able to maintain an emergency fund adequate for such crisis as a job lay off or illness (at the time I was single - one income)
- Wanted my own place, without a landlord potentially saying I needed to move.
- A pressing need to fulfill my father’s dream for all of his children to own their own homes.
Ultimately, I determined that owning was for me. Since it was financially a good choice to purchase in Massachusetts at the time, that’s what I did. Luckily, I got in early enough not to regret it, so still have home equity. I also got a fixed rate mortgage at a very low rate. The timing was right for me then, and it could be right for you now.
Is anyone out there making this type of evaluation? I would love to hear how it’s going.
Here’s the Fannie Mae List.
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Comment by Pinyo on 30 May 2008:
Thank you for your open stance on this subject. Some people like to take hard line and say one is better than the other. But in reality, it’s something that need to be reconsidered every once in a while.
Also, don’t forget that mortgage goes down with inflation, but rent always continue to rise.
Pinyos last blog post..Investing, Taking Risks, and A Game Of Darts
Comment by Talulla on 31 May 2008:
I’ve been investigating this in my area, and it’s looking pretty good, depending on the town. We’ve always wanted our own home. I’m actually starting to think we have a shot at making it happen. Good advice about not going above the ratios. That’s dangerous territory.
Comment by Trackbacks on 7 January 2009: