Rent vs. Buy

I’m saving my pennies for a down payment on a house. Someday I hope to be a home owner, yet that someday may be farther away than I had originally planned. Until then, though, is renting a financially sound option? Am I really throwing my money away? I have to live somewhere and few places are truly rent-free. Shelter is a basic necessity, obviously, and my options range from unusual to traditional. If my husband were more open-minded, some of the more unusual ideas I listed below could work:

• Build a cob house.
• Set up temporary living quarters in a Tuff Shed.
• Camp during the summer.
• Live in an RV.
• Convert a shipping container into a shelter.
• Go native – build temporary housing out of straw or mud and learn to live off the land.

These choices are unusual and all would require paying for storage to contain all of our modern possessions. However, the cost of rent would be nil and would off-set the monthly storage rental fee. Until my husband begins to think abstractly (and I learn to hunt and gather), these ideas are out of the question.

So that brings me to the more traditional rental options; renting a house or an apartment. In Southern California, rent is almost as expensive here as it is in New York City or San Francisco. I think we rank 3rd as one of the most expensive cities to live in. A few years ago, when we rented the house we currently live in, $1,800 a month seemed like a deal considering homes in the surrounding areas were selling for over $500,000. Though home prices have sank by up to 35%, rent has remained the same.

Since we aren’t as close to purchasing our own house as we would like to be, my husband and I are now talking about making a lateral move: move into another, nicer rental house for about the same price. I’m tired of the exorbitant electric bills in the summer and winter due to drafty windows, the cockroaches crawling out from under our cabinets, and the crummy plumbing. However, this got me wondering if continuing to rent was a sound financial decision. How many millionaires rent their homes? How many financially sound individuals choose to rent as opposed to buying property? What would it mean to us financially if we continued to rent for another 3-6 years?

After a little research on the subject (there is a lot of debate on this issue with the majority leaning towards buying as opposed to renting) and some calculations using both The New York Times calculator and Michael Bluejay’s calculator, buying is a more financially viable option after year 5 or 19 depending on which calculation I use. As an example, I factored in what a modest home in a good neighborhood is averaging in my neck of the woods, $350,000 with only 5% down, compared to monthly rent payment of $1,800.

• The New York Times calculator: I like that I can adjust the annual appreciation on a property and it determines if renting is more financially sound after 6 years versus 19. However, their complete analysis is a little light. The rent costs also seem a bit simplified. They approximate renter’s insurance costing $331 for 6 years and I pay more than that in one year alone!
• Michael Bluejay’s calculator: His calculator has a better explanation of why it would be better to rent up to year 5. And that is only if the amount saved is religiously invested! His calculator also breaks down renting versus buying year by year.

On a side note, using Michael Bluejay’s calculator showed that when houses in my area were selling for no less than $500,000, renting was a much better option. Buying didn’t become financially viable until year 30! I feel very sorry for those people who are saddled with a mortgage of over $500,000.  At least I knew at that time that buying was completely out of the question and renting was a better option.

Perhaps I’ll figure out where I want to purchase a house (one problem we are having with not being ready) and will have my down payment saved over the next few years as a renter.

Do you rent or own? Have you recently thought about moving, but can’t due to owning a home? Are you saving for a down payment and hope to purchase soon?

…I signed up for CreditKarma.com so I can now obsess check my score’s progress. One of the elements of my 3-step plan towards purchasing my own little house is improving my credit score so I can qualify for the best and lowest APR mortgage loan. Now that I’m privy to amortization charts, I can quickly compare a mortgage loan at 5.5% versus one at 7% and see that the amount of interest paid on the 7% loan is nearly twice the amount that someone would pay on a 5.5% APR loan. Excellent credit has its benefits!

What I like about CreditKarma.com

I really like how quickly I can check my credit score with CreditKarma.com. Of course, the score I’m seeing is my Transunion score and the last time I pulled all three credit reports my Experian score was actually higher. My Transunion score was smack dab in the middle, sandwiched between the much lower Equifax score and the slightly higher Experian score. I can only hope that my other two scores are steadily rising as well. A few other features that I find beneficial are:

• The report card: CreditKarma.com analyzes the credit score based on a few factors, such as length of history, late payments, type of credit, payment history, and new credit. I scored a ‘B’ overall. My length of history is lacking and my types of credit is also poorly misrepresented.
• Score Simulator: Hypothesizing what can happen to a credit score, good or bad, only makes me more diligent to make sure I make all my payments in a timely manner and keep my credit usage low. The simulator shows how quickly a score can plummet versus how slowly it rises.

Where CreditKarma.com needs to improve

Some of the things I really like about Credit Karma are the same things that need a little tweaking. For instance, the Score Simulator is terrific for seeing how quickly a score can drop. However, it lacks the ability to hypothesize what happens when all of your current debt is paid off. I can slide the “pay off debt” scale into the negative (like pay off my student loans), yet my score remains the same. Here are a few other things that need a little more work:

• The report card: I was able to see where I was right on target with my credit. Yet, the one area where I scored an ‘F’ was in the types of credit I currently have. This credit score factor is very elusive. When I used the simulator and found out what would happen to my score if I took on a mortgage, my credit dropped significantly.  The simulator may not have factored in that I’m missing an installment type loan that could raise my score. The report card and simulator aren’t working in conjunction with each other.
• Additional Savings Options: Credit Karma provides the credit scores for free, so they need to make money somewhere. Here is where they make a little money – offer credit cards and insurance from affiliates at lower rates. I found this feature annoying and slightly deceptive. If I signed up for another credit card at a lower rate, Credit Karma is estimating I could save around $238 over three years. However, signing up for another card could potentially lower my score based on their simulator. This feature still needs a little work and more explanation.

Overall I like the ability to view my score whenever I feel like it and for FREE. Though it may only be tracking my Transunion score, it does give me an indication of if I’m moving in the right direction or have fallen off the path toward excellent credit, my ultimate goal.

Just the other day, Get Rich Slowly wrote a terrific post about renting versus buying property. I’ve been meaning to write my own post about this, especially since purchasing property has been on my mind now for over a year. It is also one of my goals I hope to accomplish by the end of this year or the middle of next year. However, I’m still not ready to take the plunge for a few reasons:

• Down payment: I don’t have the down payment saved up. I’d like to have at least 10% saved, which would be about $30,000 on a $300,000 home. I am really far from this goal.
• House prices: Decent homes in good neighborhoods are still selling for around $300,000. We live in a suburb of Los Angeles, so our prices are a little inflated compared to the rest of the nation.
• Fluctuating income: My husband owns his own business and it’s currently a little slow (normal for January). I work as a substitute teacher so I’m not ever guaranteed work. This will also make it a little difficult to qualify for a traditional 30-year mortgage at a decent APR.
• Indecisiveness: Lately, there are a few things about LA that are really getting on my husband’s nerves. He’s been complaining about everything: from the traffic to the grocery store clientele, to our neighbors. I’m not so sure he’ll be happy in LA in a couple of years if the city doesn’t begin to offer better services, smoother roads, or less traffic! Also, there is little hope for me obtaining a teaching job within the next couple of years with the school district I work for. They are one of the largest districts, and can’t find the money to continue paying it’s teachers. I live smack-dab in the middle of that district.

This brings me to rethink our idea of purchasing property. I know that we will eventually be property owners, I just don’t know if it’s going to be as soon as I had hoped. I have been really struggling with this new train of thought. That is until I read J.D.’s post. Basically it boiled down to what it really means to own property and is it a good investment?

Deep down I know that owning property is a good thing. If by the time of retirement, the home we purchase is either paid off or is worth more than we purchased  it for, it could be used to help us retire or move. It could function as an added security later in life. However, if we move only 5 years after we purchased our property and the market hasn’t improved, we would be breaking even if we’re lucky. In that event, we would be better off renting.

I found a great, free calculator from Yahoo.com that puts renting and owning in perspective. (I tried the NY Times link on GRS, but you have to be a subscriber to use it). Here is what the calculator figured out based on my numbers:

Rent vs. Buy Calculator

You’ll notice that based on these figures, it would be better if I continued to rent. The only thing this really doesn’t calculate is the profit earned by selling the property. I’m not quite sure how that works, but I would think that if you purchased a property for $300,000 and decided to sell 20 years later, the property would be worth more than what you paid for it. This is in sharp contrast to renting for the same period of time, there’s no profit in that scenario at all.

Again, I do intend to be a property owner myself in the near future. At least now I don’t feel as rushed or guilty if I don’t own my own little house in the valley by mid-next year.

What are your thoughts? Does this calculator factor in everything? Or is it missing the resale value somehow?

As I keep tweaking my monthly budget, I’ve realized a few areas that need to be added, thanks to Money Funk. 1) Savings – both for my tuition and emergency fund, 2) life insurance – I originally left this out of my monthly budget, but pay for it every 3 months. It’s much easier to just budget it as a monthly payment, and 3.) bank charges. Since I have a couple of checking accounts that charge a monthly fee, I added them into my equations as well. In doing all of this budgeting to the penny, I realized I really need to pay down our line of credit to free up some money.

At a total of $8,380, I needed to come up with a realistic plan. As much as I’d like to send them huge lump sums and pay down this crappy debt, I have to be more realistic so that it actually happens. Using a couple of different calculators, I figured I could have it paid off between 3 – 5 years. Here are a few different scenarios using a couple of different online debt repayment calculators:

• CreditKarma’s calculator is very helpful. Based on their calculations, paying $300 a month, I could pay off our debt in 4 years. Their calculator offers a few different options to see how much quicker the debt could be paid off if I paid more monthly, or reduced the debt by a percentage.
• Bankrate’s credit card calculator lets me see how much of each payment is going towards principle and how much is going towards interest using their amortization chart. It’s shocking to see how much is paid in interest over the length of the loan. I think if more people saw this upfront before taking out a line of credit, more people would turn them down. I know I would have!

Each month, as additional funds come in that are over what I’ve set as my monthly budget, I intend to put more towards this debt. Over time, I’m hoping to pay this off before the estimated 4 years. If I can stick to my budget closely, and retain the income I’ve made in previous years, this should be rather doable.

What calculators have you used to show repayment? What about savings calculators?

Samantha Taylor is a contributing Financial Writer, Moderator and Community Mentor of  MortgageFit. She has been an active participant in the forums wherein she offers mortgage advice and suggestions to people in loan problems. If you have a query on “how much house can I afford” related issues, you can simply discuss it with her in the Mortgage Forum.

When you’re intending to purchase a new home of your choice, it is always better to work out the amount of money that you can afford as a home mortgage loan and the amount of loan that you can receive.

There are many websites that feature a home affordability calculator that can help you in working out how much money you can afford as a whole, probable down payment and the EMI (equated monthly installment) that you have to pay each month. Following are the precise steps that you have to stick with to use a home affordability calculator.

• Just open the home affordability calculator page featured by various websites.
• Input your gross monthly salary (incorporating your spouse’s salary, as well).
• Input any loan EMI amount that you’re paying at the present time. If there is no EMI that you’re currently paying, input zero in the required area where it is written “current EMIs”.
• Key in the term of your loan in years.
• Choose the interest rate of your home loan utilizing the slider available adjacent to “Interest Rate”.
• Choose the proportion of your gross monthly salary utilizing slider that you’re willing to pay as your EMI.
• See the outcomes which would demonstrate to you the “affordable EMI” together with the “maximum amount of loan you can afford”, “tentative down payment” and “value of the home you can afford”.

When the lenders are pleased with your repayment capacity, they would be willing to offer you 80%-85% of your home value as loan amount and the remaining 15%-20% you have to pay as down payment.

The highest EMI that one has to pay for the projected home must not go over 60% of their gross monthly salary. You should not forget to state the EMI amount of your previous loan if you have any at the time of utilizing the home affordability calculator.