If you are questioning whether it makes more sense to buy or rent a home, know that each option comes with significant benefits and drawbacks. Both are major financial and lifestyle decisions and there is no single answer for everyone. Therefore, before signing a mortgage or a lease, weigh the benefits and drawbacks of each choice.

Homeownership benefits
There are many good reasons to purchase a home of your very own. Among them is the sense of security and freedom owning can provide. As the mortgage holder, you have the right to make changes to the property. For example, you don’t need permission from the landlord or building owner to pull up or lay down carpet, change the kitchen countertops, or remodel the bathroom.

The financial advantages owning has over renting are also strong. Over time, most homes increase in value, meaning your investment appreciates. In the first few years most of your mortgage payment is comprised of interest charges (which is tax deductable!), and after that you’ll begin to pay off the principal. As the balance of your loan declines, the amount of equity you have in the property will steadily climb. Being a homeowner also has credit history advantages. Lenders may perceive you as a good credit risk because your home can act as security against future loans.

Homeownership drawbacks
In many circumstances, buying a home is an expensive venture. You’ll be responsible for not just the monthly payment of principal, interest, taxes, and insurance (usually referred to by its acronym PITI) but what it takes to buy the home. Before you set foot in your very own door, chances are you are going to have to come up with quite a bit of cash for pre-purchase costs. Accumulating thousands of dollars can take a lot of time and effort. Because of the upfront expenses and the monthly outlay, homeownership is not for everyone.

Another problem associated with owing your home is that if you want or need to sell but the housing market is down, you may end up stuck with the mortgage. This can cause a lot of financial and emotional stress. In the worst-case scenario, it is possible to lose the home to foreclosure if you are unable to make your payments. If that happens, all the money you put in to it is gone too.

Renting benefits
Being a tenant comes with its own set of benefits. Renting can offer a sense of freedom. Rather than having the license to do what you want with the property, you are free to leave when your lease or rental agreement is up without having to find a buyer. If you don’t want to make a commitment to a specific home or neighborhood, or know that you will not be in the area for long, renting can be the ideal choice.

Some people choose to rent their home because it is more cost effective than buying. Outside of the security deposit and first and last months’ rent, it usually doesn’t take much to get into a rental. In some areas of the country, the monthly payment is less expensive than a mortgage. The money you save by renting may be put to greater use in other types of investments. Additionally, the landlord rather than the tenant is usually responsible for most of the property’s upkeep, which can greatly reduce expenses.

Renting drawbacks
The primary problem associated with renting is that you never accumulate any equity. In fact, the money you pay each month builds the owner’s net worth, and can be a drain on yours. Also, most rental properties have a rules and guidelines that you have to follow. The agreement you sign is a contract, and it binds you to those restrictions, such as not having pet or parties, and a specific number of people who are allowed to live in the home.

Though renting does offer a level of freedom, you may sign a lease where you promise to be a tenant for a certain number of months. If you break that contract you may be held responsible for the remaining months’ rent. That can be a substantial amount of money if you agreed to remain in the property for a long time.

While many people believe that becoming a homeowner is the best choice for everyone, that is not necessarily so. It is very easy to get in over your head by buying a home that exceeds your budget’s comfort zone. It is also very easy to get used to the simplicity that tenancy offers, and waste a lot of money in the process. So is renting or buying right for you? The answer depends on you financial circumstances and lifestyle needs.

Preparing your finances for any type of housing arrangement often takes commitment from everyone in the household!

1. Track spending to know where your money goes. Identify expenses that can be reduced or eliminated – and take immediate action.

2. Expect and prepare for emergencies. Aim for six months worth of expenses set aside in a liquid account.

3. Communicate about family finances regularly with your spouse or partner, and any of your children you feel are old enough to be involved.

4. Do not try to "keep up with the Joneses." It’s a game you’ll never win.

5. Explore whether you would be financially better off if one parent were to be a "stay at home" or a "work from home" parent.

6. Unless you have endless funds, accept that you can't buy everything you want for your child. This is often harder than it sounds.

7. Remember that you are the single greatest role model in your child's financial education. He or she will remember everything, from arguments about money to how you deal with debt. Teach good habits now.

8. Pay for unreimbursed medical expenses and dependant care with pretax dollars using a flexible savings account. Check with your employer for availability.

9. Commit yourself to spending within your means. A line of credit should never be confused with an emergency fund or extra income.

10. Remember – you are not being "cheap" for the sake of saving a few dollars. You are doing it for the well being of your family over the long term, and will come out ahead by doing so.

Nolo's Essential Guide to Buying Your First Home
by Ilona Bray, Alayna Schroeder, and Marcia Stewart (NOLO, 2007)

If you’ve decided that homeownership is the right choice for you and your family, then the time is now to learn what it takes to buy your first home. Make no mistake, home-purchase is a major endeavor and you are going to want to do it right from the get-go. To eliminate the mystery and properly prepare, pick up a copy of Nolo's Essential Guide to Buying Your First Home. As with all the Nolo books, it is written in plain English and is a terrific step-by-step guide.

Authors Bray, Schroeder, and Stewart fill this weighty manual with all the information first-time homebuyers need. With it, you’ll learn whether to buy a house, condominium or townhouse, and how to select the best neighborhood for your family’s requirements. Because the mortgage you get determines the amount of money you will spend each month, their chapters on financing are especially important. The authors cover the different types of mortgages, how to get the best financing, and provides pointers on how to negotiate and close a deal.

What makes this book different from many how-to guides is the inclusion of personal stories from buyers and experts. You’ll read about the experiences other first time homebuyers had, and learn from their mistakes so you can avoid wasting your own time and money. A variety of real estate professionals, such as brokers, attorneys, home inspectors, and mortgage specialists, lend their expertise and perspective to the mix. As an added benefit, the book includes The Homebuyer's Toolkit, a CD-ROM with dozens of helpful worksheets.

Copyright © 2008 CCCS
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