It’s that time of year again when I pull my credit reports and review my credit score. One of my on-going goals has been to improve my credit score so that when the time comes to purchase a house, I can get approved at the lowest possible interest rate. So far, my score has been consistently improving. However, using various methods to check my overall credit health, I came across a grading system a few sites like Credit.com and CreditKarma.com use to explain why my score is what it is.

A credit score is determined by a few factors:

• 35% is based on payment history  – I score a B in this category. Just a few late payments a few years ago dinged me in this area.
• 30% is based on credit to debt ratio – I have an A+ here.
• 15% is based on credit age (the older the better) – I have an A+ here as well.
• 10% is based on the types or mix of credit -  I scored an F in this category (see my rant below).
• 10% is based on inquiries – I scored an A- here.

All of my categories look pretty good, except the credit mix. I’ve always been an “A” student, so seeing an “F” in one category made me see red. Using Credit.com, each section has a description that explains the possible reasons I received a particular grade in each category. Examining my credit mix, the only reason I could determine I scored an “F” is because I don’t have a mortgage. Here is an explanation from Credit.com in the credit mix category:

Credit Mix via Credit.com

I’m sure that the amount of student loan accounts don’t help (and it’s really not 11 – they’ve just been bought, sold, and rebundled a few times). However, the description states, “…consumers who have mortgages are more stable than consumers who do not.” Oh, really?!

I don’t think I can completely agree that homeowners are more credit worthy given the whole housing boom fiasco. During the peak housing boom years, pretty much anyone who applied for a home loan got one – and without their 20% down payment. Now, we’re seeing the repercussions – people are short selling and foreclosing at a higher rate than ever before. I’m pretty sure that these “home owners who secured a mortgage” aren’t more stable than me who has been paying rent on time for years (and years).

Let’s replay this – during the housing boom, a potential home buyer didn’t have to have stellar credit. These less than stellar candidates were granted home loans they really couldn’t afford. Now, many of them are foreclosing and short selling their homes and some are living mortgage free until there homes are sold or the bank kicks them out (Squatter -a person who settles on land or occupies property without title, right, or payment of rent.) Now as a renter, if I were stop paying my rent, I’d be given 30-90 days before I had to leave, not months upon months of mortgage free living. Aren’t I, the renter, the more stable consumer?! Don’t my years of rental payments count for something?! Why is it that rental payments aren’t factored into credit worthiness and therefore counted towards my score?

I’m not saying that people who are in precarious financial situations (such as a job loss or unforeseen medical bills) deserve to be bullied and picked on for foreclosing – sometimes bad things happen to good people. My rant here is that renters who pay their rent on time for years should be considered credit worthy. Somehow rent payments should be factored into a credit score.

What do you think? Should on-time rental payments be counted towards a credit score? Are home owners really more credit worthy than renters?

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?

Rent Across the Nation

My husband and I are gearing up to move to another rental house by the end of summer, beginning of fall. We’re just not quite ready to purchase our own little house in the valley, so for now we must settle for living in someone else’s little house. We currently rent a small, run-down house for $1,800 a month. We’re hoping to move to a nicer neighborhood and into a much nicer home for about the same amount. We’ve been scoping out a few prime areas and rent seems to have stablized, though hasn’t dropped much from 5 years ago when we first rented our current house. Reading other blog posts about average mortgages and keeping one’s living expenses low, made me decide to research rental costs in other parts of the USA. Here are a few random metros I chose to compare, with the range factoring in 2-bedroom apartments and small, 3-bedroom rental homes:

West

• Los Angeles: $1,100 – $2,400 a month
• San Francisco: $2,100 – $3,500 a month
• Scottsdale, AZ: $1,000  – $1,800 a month
• Las Vegas, NV: $800 – $2,400 a month

MidWest

• Denver, CO: $500 – $1,700 a month
• Omaha, NE: $550 – $2,500 a month
• Dallas, TX: $650 – $2,800 a month
• Chicago, IL: $725 – $2,600 a month
  

East

• Newark, DE: $600 – $1,300 a month
• Baltimore, MD: $700 – $3,500 a month
• New York, NY: $2,995 – $20,000 a month
• Boston, MA: $1,200 – $3,750 a month

Much of my data came from Zillow.com, then I cross-checked those prices through Craigslist.com to verify they were in the ball park. What my data doesn’t tell me is the condition of the house or the decency of the neighborhood. Choosing larger metros also may not be a good indication of rent prices in the outlying suburbs. I live in an outlying suburb of Los Angeles, so my rent range is based on that area, not within the city of Los Angeles. Using Zillow, I could have scanned outlying areas, but then I wouldn’t have any clue as to the economic status of those areas. For instance, the lower priced rentals in all of the above cities may be located in shady areas of the city, where the higher priced rentals may be in more prestigious areas. There’s just no way for me to know for sure without visiting these cities myself.

However, it looks like rent varies within each city, and this could be based on neighborhood crime rates, poverty levels, and demographics. I don’t feel like I’m paying too much in comparison to New York and San Francisco. Yet, Scottsdale and Denver seem like bargains!

My next research project on rent across the nation will be looking at monthly rent prices as opposed to mortgage payments in the area. I’m guessing some cities deeply discount their rent in comparison to what one might pay on a mortgage, while other cities cost about the same or more.

Do you rent? What are you paying? Do you live in a suburb, metro, or rural area? Do you think you pay a fair price?