After hours of discussion with my significant other, endless hemming and hawing and going back and forth on the topic of renting or buying, I’ve decided to continue renting for the next few years. The biggest factor in my decision is the mobility issue; I want the option of being able to move to a new area in 2-4 years. Though the housing market is at an all time low, my concern is getting stuck with a property that I can’t sell and may not be able to rent. My ultimate goal in is to own a house eventually, but that “eventually” is looking more like 5-6 years rather than the immediate future.

Reasons to Continue Renting (the Pros)

• Mobility – Unlike a mortgage, I can give my landlord 30-days notice or wait out a one-year lease (or whatever portion is left). I personally don’t like moving, but who does? However, sometimes opportunities arise and having the option to move is a benefit of renting.
  
• Price – Though my rent is close to many monthly mortgage payments (hey, I live in LA!), it’s still less if I count the money I save on maintenance and property taxes.
  
• Utilities - This varies, but usually apartment utilities cost less than house utilities (no lawn to water, less heat and air escape, etc.) Some rentals even include a portion of the utilities (however, I haven’t experienced this luck in quite a few years!)
• Less money spent on everyday repairs – I mentioned maintenance in my price point, but even the little things begin to add up. In the past when I’ve lived in apartment complexes, the management would come and change a light bulb for free. I can’t say this happens in many home rentals, but it can save some money in the long run.

Reasons to Buy  (the Pros)

• You can make any alterations you want to your abode – Many rentals have stipulations about painting and modifying the property. With a home, you can do whatever your wallet can afford.
• You are building equity (if you stay long enough) – Though many people are upside down on their mortgages if they bought at the peak of the housing boom, history shows that you can make a small profit if you wait it out. A heftier one if you bought when the prices were low, stay for many years, then sell in an up-cycle.
• A set mortgage payment - A 30-year fixed mortgage payment stays the same for the length of the loan. As your income increases, your mortgage payment theoretically seems less expensive and takes up a smaller portion of your overall income.
• You have collateral, increasing your net worth – If you intend to start your own business or need a large loan, a bank looks at your total net worth. As long as you’ve built a little equity in your home, you can use this as collateral for the loan.
• You can write off a portion of  your interest – Up to a certain amount, you can claim some of the interest payments on your taxes decreasing your tax bracket.
• A place to live rent-free through retirement – Hopefully, by the time a couple retires, their home is paid off. I’m not really sure how realistic this is, but it sounds good.

What are you thinking?! (the Cons to renting)

• You’re throwing your money away! – There’s no hope of recouping the money spent on rent. However, I have to live somewhere and that somewhere is going to cost something!
• Less collateral other than what you save – As a renter, I now see the importance of saving a large sum of money. If I ever needed a loan, my net worth is much lower than a home owners. However, this forces me to become aggressive with my savings.
• Cost of living increase – Every year, many rental property’s adjust the rent for a cost of living increase. Though the increase is usually small (1-3%), it does add up over time. (But then again, that’s the beauty of renting – you can reduce your living cost if need be!)

I didn’t know I needed a new roof! (the Cons of buying)

• Maintenance and repairs add up - As a renter of an old rental home who has personally invested a few hundred dollars into repairs (my slumlord is lazy!), I can see that budgeting in annual repairs can add up quickly. Without those repairs, the house quickly falls into a state of dilapidation.
• The house you can afford and the house of your dreams are on opposite ends of the spectrum – Not only do repairs cost money, but remodeling can cost tens of thousands of dollars but only return a portion of that in a sale.
• Lack of mobility – If a new job or travel opportunity presented itself, very few homeowners would be in a position to just get up and go. Unless their mortgage is very low or the house is paid off, they’re essentially stuck.
• Utilities - Homes are usually larger than apartments, meaning it takes more energy to cool and heat the house. On top of a lawn or garden, utilities can cost twice as much or more than a rental apartment. (Rental houses sometimes come with a portion of the utilities paid, but not often.)
• Negative equity - Most homeowners probably aren’t in a position of negative equity, but those that purchased a home during the boom years may be feeling a little burn right now; paying a mortgage on a home that is no longer what they bought it for.

Note that I didn’t mention how a home owner is more connected to their community, because I’m  not so sure that is accurate or something that can be proven. Or that renters are financially challenged and not as “smart” or savvy as home owners. These statements are subjective and more opinion based than the actual financial pros and cons of renting and buying. I’m sure I missed a point or two, feel free to share something I might have missed. As a side note, I also like using Michael Bluejay’s Rent vs. Buy calculator for a guideline.

Are you a renter who feels like they made the right choice in renting? Does it fit your lifestyle better? Are you a homeowner who thinks that home owning isn’t what it was made out to be? Or are you perfectly happy in your choice?

Renter's Win, Home Owners Lose by Tom Graneau

Five years ago at the peak of the housing market, my husband received a call out of the blue from a mortgage broker. He had automatically qualified for a home loan up to $290,000. However, living in Southern California, there weren’t any properties selling for this low of a value. He kindly turned down the offer and we continued our lives as renters.

At that time, houses in my area started at $435,000. For that price, we’d be buying a major fixer upper in a questionable neighborhood. Though friends were saying it was a good time to buy because loans were so attainable, I just couldn’t get the math to work out in our favor. I was under the impression that you shouldn’t buy a home for more than 3 times your income. Based on what homes were selling for, I couldn’t believe that the majority of people were making double six figures, or $200K annually. Needless to say, the income to house price ratio was thoroughly out of whack. People were still only making about $55,000 to $130,000 annually, yet purchasing homes averaging around $550,000.

Why were these people duped into home ownership? Given my own personal experience, people really believed their homes would never lose value. If they didn’t buy now, they’d never be able to afford a home based on the exponential increase in prices.

Renters Win, Home Owners Lose: Revealing the Biggest Scam in America by Tom Graneau was written in response to this most recent housing bubble. When I was asked to write a review on this book, the title alone intrigued me. As a renter who wants to own a home someday, I was curious about his research.

Summary

Renters Win, Home Owners Lose is a look at what fed into the most recent housing bubble and its decline: the media, real estate agents, mortgage brokers, greedy financial institutions. Too many people were “forced” into home ownership not really understanding the responsibilities associated with it. The idea of the “American Dream” is still ingrained in most American’s minds, leading them to do whatever is necessary to purchase property. A house or piece of property is looked at as an investment in one’s future. However, Mr. Graneau begs to differ.

Points of interest I agreed with

Mr. Graneau made a few strong points about how renters have more advantages and positive cash flow than most home owners.

1. They are not responsible for repairs. This can save renters a large amount of money in the long run. Home owners are responsible for minor and major repairs which can cost thousands of dollars a year.
2. They are not responsible for Home Owner Association Fees. Renters are not responsible for these fees. However, I would assume that a home owner who is renting a property has already factored in the HOA fees into the monthly rental amount. The only time this would be in the renters favor would be if the HOA fees increased, yet their rent didn’t increase to reflect the difference.
3. They save money on property taxes. Again, as a renter I assume my landlord has already factored in property taxes into my monthly rent. Since I live in a state that hasn’t raised property taxes in 30 years, my landlord comes out ahead. However, landlords living in states with high property taxes probably have trouble adjusting rents to keep up with the tax increase.

One of Graneau’s major points was that home owners tend to stretch themselves thin to make a monthly mortgage payment. If they had remained renters and had invested the difference, they would come out ahead in the long run. The problem usually lies in the fact that renters don’t invest the difference, so the majority don’t come out ahead.

Another advantage I would have added to his list is the ability to relocate. Many home owners are literally stuck; they can’t sell their homes because the market is depressed, and they can’t rent them out to cover their mortgage. All a renter needs to do is give their landlord a 30-day notice. Of course, if they are in a lease, they might have to offer them a settlement amount for the remaining portion.

Overall his message is to be realistic when purchasing a home. It’s not an investment, per se, it’s a place you will live. The idea of flipping it with 5-years is unrealistic given historical data on housing prices.

Points I didn’t necessarily agree with

Since the book was in direct response to the current housing market, a bear market that we haven’t seen in decades, much of his advice is biased. For instance, if a person sticks to the 2.5 times to 3 times their income to house price ratio, it’s not uncommon to obtain a mortgage for less than one would pay for the same property, but in rent. A few advantages (in my opinion) to owning a home, or complete washes to either are as follows:

1. Monthly mortgage may be lower than monthly rent. I live in an area where monthly rent averages about $2,000. Currently, “starter” homes are selling for about $300,000. At today’s low interest rate, my mortgage would be less than what I’m currently paying in rent. (Of course I’d have to factor in maintenance costs).
2. Insurance is a wash. One of Graneau’s renter’s advantages was that home owners spend more money on insurance. However, as a renter, I’m paying the same amount for renter’s insurance that my landlord pays on home owner’s insurance. Of course, I’m sure it has something to do with living in California.
3. Responsible home owners can eventually make some of their money back, or at least break even. As a renter, I will never, ever get any of my rental payments back. Not now, not ever. Yes, home owners pay a large portion in interest. But, if they sit on their homes for 10+ years (maybe more, maybe less depending on the market), they will get some of that money back that they paid in. Renters will never benefit from the potential to break even.
4. Home owners end up “homeless” when things go awry. Don’t pay your mortgage, eventually the bank will take your home. However, it takes many, many months for the bank to actually kick a home owner out on their ear. This hopefully gives the home owner (soon to be renter again) time to save up a little money and make a solid financial plan. Their credit is now wrecked. However, if a renter doesn’t pay rent by day 5 or 10, guess what? They only get about 30-45 days to get their finances in order and then hit the street. Their credit is now in the dumpster as well.

Over all, Graneau’s ideas left me thinking that renting isn’t such a bad option;  a point he was trying to make. It also made me think about the reasons I want to own a home. If anything, when and if I become a home owner, I will definitely be making the largest financial decision of my life.

Based on my pros and cons, what questions might you have for the author?  Would you be interested in reading his book?

Upside Down?

I recently read an article on MSN.com about underwater homeowners that made me a little angry. First, the article’s focus was on a young lemming, I mean man, who was only $30,000 “underwater” on his mortgage. I say “only” because though he may be slightly upside down on his mortgage, $30,000 isn’t nearly as much as some current homeowners today. Second, the reason this young man was the focus of the story was because he was hoping to find a job elsewhere and felt “tied-down” to his house. Didn’t he think about this commitment when he purchased his house to begin with? Obviously not.

The recent housing bubble seemed to entice many people into home ownership without thinking about the true consequences of owning a home. It sort of reminds me of the lemmings all falling off a cliff together. As a person on a mission to own a home in the near future (though that may be anywhere from 1-3 years from now), there are some definite advantages and disadvantages that need to be clarified:

Advantages of owning a home:

• If you live in your home long enough (usually a minimum of 5-7 years), you can make a small profit or at least recoup some of your mortgage payments. With renting, you never recoup any of the money you paid over time. Some will argue that renting costs much less than owning and you can invest the difference. However, I beg to differ. I live in an area where rent is about the same as a mortgage (at least at this moment in time).
• You can settle into your home knowing you’ll be there as long as you’d like (providing you continue making your mortgage payments!) Renting a house means you are subjected to the owner eventually selling the place or raising your rent beyond what you can afford. At least with a mortgage, you know how much you are paying each month (unless, of course, you didn’t read the fine print!)
• You can decorate your home anyway you feel. As a renter, I’ve had to repaint walls back to eggshell white because my creative inspiration ticked off the landlord.
• You can keep as many pets as your city allows you to. Another disadvantage with renting – some places don’t allow pets or have a maximum allowable amount (usually 2).
• Tax write-offs. Some of your interest can be written off your taxes. I’m not very familiar with this. Anyone care to comment on this advantage?

Disadvantages to owning a home:

• If you need to move to find a new job, you might have a harder time moving. With a mortgage, you’ve signed an agreement to pay on the property for 15 to 30-years. Of course, there are alternatives to selling your home, you could rent it if need be. In contrast, as a renter I can move with a 30-day notice; no strings attached.
• If you purchased your home at the peak of a housing bubble, your home may have lost thousands if not hundreds of thousands of dollars on your investment. Obviously, this could be a serious negative consequence of owning a home. However, if you’re willing to live in the house 15-30 years, you might be able to recoup that loss due to appreciation. This doesn’t apply to renters.
• You might see your home as an ATM and pull out whatever equity you’ve built up. A common trend seen during the past bubble was people taking out home equity loans, or easy money. Those loans need to be repaid and now that the homes aren’t worth what they were, they now have negative equity. Renters are never in a position to “borrow” back some of the rent they paid so that easy money loan stuff doesn’t exist.
• Home repairs. In order for homes to remain in a livable condition, annual maintenance and repairs need to be completed. Depending on the state and age of a home, those repairs can be costly. As a renter, I’m technically not responsible for repairs, which theoretically saves me money. (Someone needs to remind my landlord of this!)

I’m sure there are more advantages and disadvantages that I could list. The bottom line is most people have to pay for shelter. You can either own that shelter or rent it. Because of the recent housing fiasco, many people view owning property negatively. Yet there are still benefits to both renting and owning. So don’t be a lemming! Weight the pros and cons then make a sound financial decision based on your own needs.

Next week I’ll be reviewing a book called Renter’s Win, Homeowner’s Lose. The title alone piqued my interest. Stay tuned for my review….

What other advantages or disadvantages am I missing? I’m I way off the mark?

This guest post was written by Go Banking Rates, bringing you informative personal finance content and helpful tools, as well as the best interest rates on financial services nationwide.

Buying a home is especially difficult these days, especially because it’s hard to predict what will happen next. Mortgage interest rates and home prices are at their lowest in decades, but it doesn’t mean now is the time to buy.

The real issue is whether you’re really getting the best deal possible on your home: Interest rates are low, but they could keep dropping. Prices are down, but they may not seem so spectacular in a couple of years from now. A home you would have considered a steal five years ago may be ridiculously expensive now, right? So how do you buy a home in a down market and know you’re paying what you should?

How Market Value Is Determined

The market value of a home is what a seller can expect to receive from a buyer at any given time. It’s sort of like the Blue Book value on a car–an average asking price, but not necessarily the exact amount someone would pay.

The market value is determined by a professional like a real estate appraiser or agent based on a number of considerations. These can include what homes of similar size and location have sold for in the past six months to a year, but does not factor in things like cosmetic improvements made to the property. Importantly, the market value of a home can change dramatically over a short period of time, which is why the number is not completely reliable.

How To Tell If a Home is Worth Its Price

One way many potential buyers gauge whether the property they’re interested in is a fair price is similar to how appraisers judge market value–by comparing it to similar homes for sale in the area. However, this can be misleading. According to lendingtree.com, homes that have been on the market for just over three weeks might be priced too high.

Valuation

This is why valuation is important to consider. Valuation is the difference between what a home should cost and what the actual price is. For example, CNNMoney reports in mid-2006, at the height of the housing bubble, 53 metro areas were considered to have over-valued properties. Just two years later, that number dropped to only 8.

Aim for Pre-Bubble Prices

Right now, most areas are considered to be undervalued, which means you could score a good deal on a home. Additionally, due to the recession, unemployment and high rates of foreclosure, the demand for homes for sale is weak. This means sellers are forced to cut prices even further to entice buyers.

Even if it’s already a bargain basement price, judging the accuracy of a home’s market value can still be difficult. To be sure you’re really going to get your money’s worth from a purchase and not want to kick yourself years down the road when prices drop further, judge how closely the asking price matches what you would expect in a “pre-bubble” environment.

MSN Real Estate writer Luke Mullins describes a scenario where we will return to pre-bubble prices where there was only an increase of one to two percent above the inflation rate over the next decade. This is in line with average historical appreciation rate of about half a percent every year when adjusted for inflation. So, with this trend in mind, compare the historical value of a property you’re interested in against the asking price today. Ascertain whether the two match up by starting from 1995 and adding a percentage point or two above inflation each year until you get to 2010.

Will Home Prices Continue to Drop?

Even if home prices are abnormally low now, they might continue falling, making a premature purchase more expensive than necessary. Associated Press real estate writer, Alan Zibel, explains that home values are projected to to decline well into 2011 and maybe even 2012. He writes that Moody’s Analytics senior director expects “home prices could drop another 20 percent by early 2012 if there is another recession. If the economic recovery remains on track, she sees prices falling another 5 percent and hitting bottom early next year.”

Waiting for home prices to fall further could really be a gamble, though. It seems they will trend downward at least for a little while longer, but wait too long and you might miss out on rock-bottom numbers. Homes are already priced at historical lows, so if you use the above criteria to judge a home’s true value and find you’re set-up to profit from your purchase in the future, you might want to snag the opportunity while it presents itself. Of course, missing the boat and buying on the way up will still ensure that you’re purchasing during a time when home prices will continue up.

This is a guest post from Lender411 who allows consumers to compare today’s mortgage rates in their area instantly and for free online, consumers are also matched with 4 local lenders who can take care of their specific mortgage needs and compete for their business. 

Money flows in a lot of different directions when you buy a house.  There’s the down payment, the mortgage interest, the closing fees, and numerous other costs.  But there are ways to save money in the midst of the chaos.

Compare your options.  Don’t pick a loan package until you’ve thoroughly researched at least five or six different offers.  Check out rates, fees, and terms.  Get a Good Faith Estimate (GFE) from any lender you are seriously considering.  A GFE itemizes every cost associated with the mortgage so you can see exactly how much the deal will cost.  Lenders are required by law to provide this document to you if you request it.  Don’t be afraid to negotiate, either.  It’s not hard to find the best mortgage rates if you’re willing to take some time and do some research.

Get a shorter mortgage.  The shorter your mortgage term, the less money you’ll pay in the long run.  You can save literally hundreds of thousands of dollars, depending on your overall loan amount, by going with a 15-year mortgage instead of a 30-year mortgage.  This has been financially proven over and over again.  If you can afford to make slightly higher monthly payments, get the mortgage with the shortest term possible.

Assume an existing mortgage.  If the seller of the home has not paid off the current mortgage, you might be able to simply take over the existing mortgage.  If the mortgage is transferrable and the seller agrees, you could end up with a significantly lower interest rate. Of course, you need to guarantee that the interest rate on the existing mortgage is lower than the interest rate you could get on a new mortgage, and you’ll still have to pay the difference between the home value and the current mortgage balance, but you may be able to save a substantial amount of money in lower interest over the years and you may not have to pay any closing costs at all.

Skip the mortgage insurance.  If you’re a risky borrower, some lenders may require you to pay for mortgage insurance before the loan closes.  Once you’ve taken out the mortgage and you’ve made a few payments, however, your lender will likely allow you to drop the insurance.  This can save you a great deal of money.

Pay off your mortgage early.  You’ve heard this one before.  If you can scrape enough money together, make extra payments on your mortgage as often as possible.  Tell your bank to apply these extra payments directly to the principal of the loan.  In effect, this shortens the term of your mortgage, which will lower the amount of interest you’ll have to pay over the course of the loan, as mentioned above.  Make sure your mortgage won’t penalize you for early repayment, however.  This is common.  Try to arrange a deal that allows for this.  It’s staggering how much you can save.