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?

Alexander, Who Used to be Rich Last Sunday

For those of you who know this story, you’ll know exactly what I’m referring to. For those of you who don’t, enjoy my version….This story is based on the story written by Judith Viorst titled Alexander, Who Used to be Rich Last Sunday.

It’s not fair that Sergey Brin is 32 and has eleven million dollars, four quarters, and three dimes in his bank account. It’s not fair that Reed Hastings has eight million dollars, four dollars, seven dimes, and eighteen pennies in his bank account. It’s not fair that all I have is…..fluff in my pockets. And that’s all I usually have is …… fluff in my pockets.

Last Sunday was pay day and I had a cool $800 left over after paying all the bills. I was rich. I decided I’m absolutely, positively saving my money for a down payment on a house. However, I decided to go window shopping at the mall. The cute espidrills and black mary jane loafers were calling my name. Since it was a buy-one-get-one day I thought I could afford to part with my money because I was saving money in the end. Good-bye $42.50.

The remaining $752.50 was definitely going in my savings account. But then I got hungry. I headed out to Chili’s to treat myself to an appetizer and a meal. Happy hour prices seem so affordable! The waitress was awfully kind and deserved a decent tip. Good-bye $25.00.

I’m sure by now Reed Hastings would tell me I won’t be able to afford a house until I’m 99. If I still lived with my parents, I bet I’d have to pay them for saying things no young lady is ever able to say. Thankfully I can keep those three dollars since I don’t live at home and personally don’t know Reed Hastings.

My $732.50 is certainly, most positively going into the savings account! Until I looked in my refrigerator and realized I was out of a few things. A quick trip to the grocery store and $65.75 later I now have a partially stocked fridge. As I was scanning my checkbook register later that day, I realized I could make another payment to my crummy line of credit to get that baby out of the way. Good-bye $200.

Four-hundred, sixty-six dollars and seventy-five cents is absolutely, positively going into my savings account. Crap! I washed my favorite capri’s that had a five dollar bill in the pocket. Good-bye five dollars. Good-bye flashlight.

If Sergey Brin were here to comment on my despicable progress I’m sure he’d say I won’t be able to buy a house until I’m 199. My parents would say there are just some things well-respected girls never kick, no matter how ratty or mean someone’s comments are. I’d owe them another dollar. Thankfully, I moved out of my parents’ house years ago.

I used to be rich last Sunday. Now all I have left is $461.75 and fluff in my pockets. After this long, holiday weekend I’m sure I’ll be waiting for payday to come around quite soon. Then I’ll definitely, positively put my money in my savings account.

Between my bike challenge for April and May and my debt repayment strategy plan, I’ve been keeping myself in check  with accomplishing my goals through baby steps. My bike challenge is much more rewarding; at the end of the week I can successfully say that I’ve accomplished my 24 miles for the week, if not more. It’s great exercise, so I don’t feel guilty if I scarf down a bowl of mint chocolate chip ice cream, and I’m saving wear and tear on my car and gas. Basically I’m saving money by committing to this challenge.

My debt repayment plan is on track as well, I paid $400 in April towards my crummy line of credit (my original goal was to pay $525, so I’m a little short). In contrast to my bike challenge, it’s not nearly as much fun! As much as I like seeing that total debt shrink, I also notice my bank account going in the same direction. Yet, I must keep persevering so that I can pay it off, then save that monthly payment for my down payment. At that point, I will also be in a good position to open an IRA and begin seriously contributing.

Summary of my goals and challenges for April (to keep me honest!):

• Bike Challenge: 60 miles in 16 days. That’s 12 miles more than what I had committed to. Whoo hoo!
• Debt Repayment Plan: reduced line of credit to $7,930. I would have liked to have paid off another $125 so I’m a little behind on this goal.

Crummy Loan Count Down

April / May Bike Challenge

Late summer goals that I will be pursuing by August:

• Open IRA
• Increase my savings account by a significant amount (I really can’t compute an actual number yet since I’m moving funds around and my income fluctuates greatly!)

I will continue end of the month status reports to help me stick to my goals. Hopefully, my current goals will help me meet my late summer goals!

What goals have you made this year? Are you meeting them? What about the goals you are behind on, do you feel guilty?

Cut up those credit cards?

One of my goals for this year, that I have partly accomplished, is raising my credit score. I need to get my score above 740, at minimum, so that when I apply for a mortgage loan, I’ll be able to get the best rate. I still need to raise my score about 40 points (this is an average as all 3 credit bureaus are reporting slightly different scores). One thing I’ve learned about improving my credit score, is keeping my debt to credit ratio low. Since I’ve paid off all of my credit cards, I’m looking pretty good here. However, another factor that affects a credit score is how much total credit banks are willing to loan you. Since I’ve been on a mission to improve my poor credit history, I haven’t had much credit extended to me these past few years leaving me with very low credit limits.

So, here is my dilemma: I have two credit cards with low credit limits that are charging me monthly fees and/or annual fees (totaling approx. $155 for the year) . I don’t use these cards at all anymore. However, there is a catch with these two cards: they were originally a way to pay off old collection debt. These cards were offered to me about 6 years ago to pay off two other credit cards that had gone into collections. Once I paid the old debt off in full, they extended a limited amount of credit to me. I’m now thinking of canceling these two credit cards now that they are paid in full, but then my overall total available credit limit will be reduced by almost $1,000. How will this affect my credit score? Will it ding my score by a few points? Since I’m hoping to apply for a mortgage loan with in the next year or so, I’m trying very hard to keep the activity on my credit report to a minimum.

After doing some research, canceling my two credit cards would probably affect my credit score a little bit. By how much, I don’t know exactly. I have two options; A.) I cancel these cards and save $155 annually, with the potential of losing a few points off my credit score, or B.) I keep these cards until I am able to purchase a home.  That could be up to 18 – 24 months meaning I would have to spend up to $310 on fees, but I’d be saving my credit score.

For now, I think I will keep the cards. If purchasing a house becomes ever more elusive and my time frame extends to more than 24 months, I might just go ahead and cancel these two cards. I do know that when I obtain that mortgage loan, these two cards are getting the ax!

What do you think? Would canceling these cards now be beneficial? Am I making the right choice by keeping these cards a little longer?

A nice house. But should I buy it?

As I browse the business sections of MSN.com, so many articles are written to encourage prospective buyers to take the plunge and buy a house. Headlines read like a “going out of business” sale, “Mortgage rates at rock bottom, buy now” is the theme. But just because mortgage rates are the lowest they’ve been in years, and home prices are much more reasonable than three years ago, does that mean everyone should go out and buy a house?

I’m playing devil’s advocate here, even though my goal is to purchase a home of my own, because I think these articles that are appearing in the business section of major news sources mislead prospective buyers. My stance is this: No one should buy a home unless they are financially prepared to do so, no matter how low interest rates are or how inexpensive homes may seem. Financial Samurai recently posted his interview with Consumerism Commentary and stated that he believes in the 30/30/2 rule when it comes to purchasing property. That is you have 30 percent saved, for a 30 year mortgage (I think this is the second 30, I can’t remember this one – Sam?), and pay no more than twice your annual income for the house. I agree, but with a slightly different variation; a person can probably comfortably afford a home at 2.5 time their income.

This means, however, that if you want to purchase a $300,000 house, you need $90,000 saved. How many new home buyers do you know that put down that much in cash for a house? It’s difficult to save that much money when an average salary hovers around $40,000. And, if you only make $40,000 a year (add a spouse that may equate to $80,000 total income), your home should cost no more than $200,000. Where I live, there are few homes in this price range. So what does this mean? It means I’m not ready to own a home yet, even with articles luring me to purchase because mortgage rates have never been this low and are primed for spiking within the next year.

Marketing pressure is what lead to the recent housing bubble, hopefully this pressure isn’t leading more purchasers down this same path. With tighter lending practices in place, due to the financial melt down, this should remedy some of the problems of the housing market. However, no matter how enticing home prices and mortgage rates seem,  I won’t be making that plunge until I’m sure I can afford a home comfortably.

What is your thought on buying a home? Is it always the best option? Are renters financially illiterate people? What about all the articles sounding like advertisements for prospective home buyers? Should people follow the advice and just buy a home before it’s too late?